Supermajority Director Removal Bylaw Is Unlawful
The Delaware Court of Chancery recently invalidated a bylaw that required a supermajority vote of at least two-thirds of all outstanding shares to remove a director because it was inconsistent with the Delaware General Corporation Law (“DGCL”). The DGCL explicitly provides that directors may be removed by the holders of a majority of the shares then entitled to vote, thereby effectively prohibiting a bylaw provision requiring more than a majority to remove directors.
In Frechter v. Zier, C.A. No. 12038-VCG, 2017 WL 345142 (Del. Ch. Jan. 24, 2017), a shareholder of Nutrisystem, Inc. challenged the validity of a supermajority director removal bylaw. Vice Chancellor Glasscock held that this bylaw ran afoul of 8 Del. C. § 141(k). While the DGCL is an enabling statute, bylaws may not contain any provision that is inconsistent with law or with the certificate of incorporation relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders. Section 141(k) explicitly provides that “[a]ny director of the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors” subject to two exceptions. Because the challenged bylaw provision deprived a simple majority of eligible Nutrisystem shares of the ability to remove directors, the bylaw is, unambiguously, inconsistent with the statute and therefore unlawful.
Of note, the Court also referenced a recent and related bench decision by Vice Chancellor Laster. See In re VAALCO Energy, Inc. Stockholder Litig., C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015) (TRANSCRIPT). In it, the Vice Chancellor found that § 141(k)’s authorization to remove directors with or without cause prohibited bylaws requiring cause for removal.
The takeaway is that the DGCL provides that a simple majority of all outstanding shares eligible to vote may remove directors with or without cause; any bylaw provision effectively limiting that power is invalid. Director removal bylaw provisions carefully should be reviewed to ensure compliance with the DGCL and recent rulings by the Delaware Court of Chancery discussed above.