The following is a reposting of the ABA’s Flash Report, a summary of key court rulings and/or issues, written by Brett M. Amron, Development Chair of the D&O Liability Committee for the Business Law section of the ABA.
In In re Vaalco Energy Shareholder Litigation, C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015) (TRANSCRIPT), the Delaware Court of Chancery held that, if a corporation has neither a staggered board nor provides for cumulative voting, provisions of its charter or bylaws that purport to limit director removal to “for cause” only are invalid under Delaware law.
Section 141(k) of the Delaware General Corporation Law grants stockholders the broad power to remove directors with or without cause. Section 141(k) enumerates only two exceptions to this default rule: (1) when the board of directors is classified pursuant to Section 141(d) of the Delaware General Corporation Law, or (2) where the stockholders have cumulative voting rights for the election of directors. Accordingly, where the charter does not provide cumulative voting rights, directors serving on a non-classified board who are elected by the stockholders generally may be removed with or without cause by vote of holders of a majority in voting power of the outstanding shares.
Until 2009, Vaalco’s board of directors was classified and, in compliance with Section 141(k), its directors were removable only for cause. Vaalco subsequently amended its charter to declassify its board of directors. After the declassification, Vaalco left in place charter and bylaw provisions purporting to limit the removal of directors “for cause” only.
In late 2015, an activist investor sought to remove certain Vaalco directors without cause. In response, Vaalco contended that, pursuant to its organizational documents, any removal had to be for cause. In response, plaintiff stockholders brought suit, seeking a declaratory judgment that, absent a staggered board or cumulative voting provision, Vaalco’s director removal “for cause” only provisions violated Section 141(k). Agreeing with Plaintiffs, the Court held that the provisions at issue were invalid under Delaware law, as they violated the plain language of the statute.
In so holding, the Court acknowledged that, as Vaalco had demonstrated, approximately 175 Delaware companies with non-classified boards have provisions in their organization documents limiting the removal of directors “for cause” only. The Court found unavailing Vaalco’s argument that, based on the relative prevalence of such provisions, it should validate Vaalco’s “for cause” only provisions under Section 141(k). Thus, in light of Vaalco, these companies have little recourse but to take steps to amend their organizational documents to eliminate such provisions. (It should be noted, however, that where the corporation’s certificate of incorporation does not allow for stockholder action by written consent in lieu of a meeting and the organizational documents do not permit stockholders to call special meetings, the issue may not be as urgent, given that stockholders will not in any event have the ability to take action in between the regular annual meeting cycle to remove directors).
Vaalco did not appeal the Court’s ruling. Therefore, the Vaalco opinion provides the latest court guidance to boards and their stockholders on removal of directors under Section 141(k).
Delaware corporations with plurality voting should review the impact of this ruling on their corporate defense profile as the validity or invalidity of these provisions could impact challenges to board composition in the future.