Delaware Court of Chancery Rejects Bylaw That Required Supermajority Stockholder Vote to Remove Directors in Violation of 8 Del. C. § 141(k)
In Frechter v. Zier, C.A. No. 12038-VCG, 2017 WL 345142 (Del. Ch. Jan. 24, 2017) (Glasscock, V.C.), the Delaware Court of Chancery granted plaintiff’s motion for summary judgment on a declaratory relief claim and held that 8 Del. C. § 141(k) prohibits company bylaws from requiring more than a majority vote to remove directors from a company’s board. The Frechter decision confirms that company bylaws may not impose requirements or implement procedures that conflict with 8 Del. C. § 141(k).
Section 141(k) of the Delaware General Corporation Law (“DGCL”) provides that that any director “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 certain exceptions. In January 2016, the Nutrisystem board amended the bylaw governing the removal of company directors to provide that no director could be removed from office except by the affirmative vote of no less than sixty-six and two-thirds percent of the voting power of all outstanding shares.
Plaintiff filed a putative class action complaint contending that (1) the directors had breached their duty of loyalty by enacting an unlawful bylaw and (2) he was entitled to a declaratory judgment finding that the removal provision was in violation of 8 Del. C. § 141(k). Defendants moved to dismiss, and plaintiff moved for summary judgment. Plaintiff represented that he would not pursue his breach of fiduciary duty claim if the Court found in his favor on the declaratory judgment.
The Court granted plaintiff’s motion for summary judgment as to the declaratory judgment claim. The Court noted that the DGCL is an enabling statute which allows bylaws to contain any provision “not 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 power of its stockholders.” Section 141(k) of the DGCL provides that that any director “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 certain exceptions.
The Court held that Nutrisystem’s removal provision was inconsistent with the plain language of Section 141(k). In so holding, the Court rejected defendants’ argument that the removal provision was permissible because 8 Del. C. § 216 permits corporate bylaws to specify the number of votes required for the transaction of corporate business “[s]ubject to this chapter.” While defendants conceded that the specific provisions of Section 141(k) trumped Section 216’s general language, they argued that Section 141(k) was merely permissive, not mandatory, due to the fact that it did not use the words “shall” or “must.” The Court found this was an “unnatural” reading of the statute that would render it an effective nullity. The Court also noted that defendants’ reading of Section 141(k) also was inconsistent with the recent opinion in In re VAALCO Energy Inc. Stockholder Litigation, C.A. No. 11775-VCL (Dec. 21, 2015) (TRANSCRIPT), where the Court held that the language of Section 141(k) providing that directors “may” be removed with or without cause prohibits bylaws requiring that removal be for cause. The court found that Section 141(k) “unambiguously” confers the power to remove directors on a majority of votes, and that any rule to the contrary is unlawful.
Frechter confirms that companies may not adopt bylaws that conflict with the provisions of Section 141(k), and that the Chancery Court will view skeptically actions by boards of directors that appear to impair stockholder voting rights.