A recent decision by the Delaware Court of Chancery tackles the question of whether a stockholder may adopt a bylaw granting stockholders the right to remove officers.  In Gorman v. Salamone, C.A. No. 10183-VCN (Del. Ch. July 31, 2015), Vice Chancellor John W. Noble ruled that such a bylaw was invalid under Delaware law.

The stockholder grounded his argument on Section 142(b) of the Delaware General Corporation Law, which provides:

Officers shall be chosen in such manner and shall hold their offices for such terms as are prescribed by the bylaws or determined by the board of directors or other governing body.  Each officer shall hold office until such officer’s successor is elected and qualified or until such officer’s earlier resignation or removal.  Any offer may resign at any time upon written notice to the corporation.

According to the Vice Chancellor Noble, Section 142 allows the bylaws to establish a method for selecting officers and prescribing their terms of office.  It does not, however, “speak to how corporate officers may be removed, never mind grant stockholders such a power”. Absent statutory authorization, the bylaw improperly impinged on the board’s authority to manage the corporation.

This set me to pondering whether the same result would obtain under the California General Corporation Law.  Section 312(b) of the California Corporations Code is similar:

Except as otherwise provided by the articles or bylaws, officers shall be chosen by the board and serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment.  Any officer may resign at any time upon written notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.

However, the exception in the California statute applies to both the manner in which directors are chosen and their tenure of service.  Thus, the California statute allows for the articles or bylaws to provide that officers will serve other than at the pleasure of the board of directors.  Professor Harold Marsh’s treatise explains the statute as follows:

For example, it would be possible, although unusual except perhaps in a close corporation, for the articles to provide that one or more of the officers are to be chosen by the shareholders.  In that case it would be permissible also to provide that the officer could not be removed from his office by the board of directors.

R. Roy Finkle, H. Marsh & L. Sonsini, Marsh’s California Corporation Law § 10.02 (4th ed.).

n.b. – Although I contributed two chapters to Marsh’s treatise, I did not contribute Chapter 10.