- Delaware Court of Chancery Invalidates For-Cause Removal Requirement for Unclassified Boards of Directors
- February 11, 2016 | Authors: James P. Dougherty; Robert S. (Rob) Faxon; Robert W. (Bob) Gaffey; Lyle G. Ganske; Andrew M. (Andy) Levine
- Law Firms: Jones Day - Cleveland Office ; Jones Day - New York Office ; Jones Day - Cleveland Office ; Jones Day - New York Office
- On December 21, 2015, Vice Chancellor Laster of the Delaware Court of Chancery invalidated provisions in a company’s certificate of incorporation and bylaws that purported to limit the ability of stockholders to remove directors without cause. The ruling, which has not been appealed, held that for-cause removal restrictions are valid only in the statutorily enumerated situations of classified boards and elections of directors by cumulative voting. Many companies, however, currently have the problematic combination of for-cause removal restrictions and unclassified boards, which could set the stage for opportunistic litigation.
VAALCO Energy, Inc. ("VAALCO", "the Company"), amended its certificate of incorporation in 2009 and declassified its previously staggered board. The Company, intentionally or not, did not amend that part of the certificate of incorporation that allowed removal of directors only for cause. There was a similar provision in the bylaws. In early November 2015, a band of activist investors known as Group 42 began a consent solicitation to replace a majority of the Company’s board. The board responded by publicly announcing that any attempted action to remove the directors would be null and void because VAALCO’s certificate of incorporation and bylaws permitted removal only for cause. Litigation in the Court of Chancery followed, focusing primarily on the meaning of Section 141 of the Delaware General Corporation Law.
Vice Chancellor Laster’s Ruling
On December 21, 2015, in a short bench ruling, Vice Chancellor Laster invalidated the for-cause removal provisions. The court held that the plain language of 8 Del. C. § 141(k) "states affirmatively" that directors may be removed with or without cause by a majority of the stockholders: "That is the rule." According to Vice Chancellor Laster, the only exceptions are the cases of a classified board or cumulative voting, as specified in Sections 141(k)(1) and (2). Because VAALCO did not meet either of those exceptions, the default rule applied and the directors could be removed without cause.
During the litigation, VAALCO attempted to bolster its position by pointing out that over 175 other companies had an unclassified board and for-cause removal requirements in their bylaws, certificates of incorporation, or both. But the court concluded that a strict reading of the statute compelled the result here. Many companies currently are or could find themselves in the same situation as VAALCO. Already plaintiffs in four states have filed at least eight lawsuits accusing boards of directors of entrenching themselves because of a for-cause removal provision paired with an unclassified board.
Companies should consider reviewing their bylaws and charters in light of the VAALCO decision to avoid lawsuits in which they may be liable for the plaintiffs’ attorneys’ fees. Companies with unclassified boards and a for-cause removal provision in their certificate of incorporation or bylaws should consider seeking legal counsel on a strategy for amending their certificate of incorporation and dealing with possible lawsuits in the interim.