Delaware Court Decisions Illustrate Need for Bylaw Review

Two recent Delaware Court of Chancery decisions have invalidated corporate bylaws relating to the removal of directors. These decisions illustrate the need for companies — including those that are newly public — to periodically review their organizational documents to ensure compliance with law and emerging best practices.

In Frechter v. Zier, C.A. No. 12038-VCG (Del. Ch. Jan. 24, 2017), the Court of Chancery invalidated a company’s bylaw that required a 66 2/3% vote of the outstanding shareholders to remove directors.  The Court noted that although the Delaware General Corporation Law (DGCL) is an enabling statute, it permits bylaws to contain only provisions that are “not inconsistent with the law or with the certificate of incorporation.” The court held that the bylaw violated Section 141(k) of the DGCL, which provides that “any director or 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 the election of directors.”  The Court did not, however, address whether a similar provision would be permissible if it was included in a company’s certificate of incorporation, citing Section 102(b)(4) of the DGCL, which permits a certificate of incorporation to impose higher voting requirements for corporate actions.

Similarly, in a bench ruling in In re VAALCO Energy, Inc. Consolidated Stockholder Litigation, C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015), the Delaware Court of Chancery held that neither the certificate of incorporation nor the bylaws may provide that directors serving on non-staggered boards may be removed only “for cause,” unless the directors are elected by cumulative voting.  The court held that the “for cause” limitation violated Section 141(k) of the DGCL, which permits directors to be removed with or without cause, except in the case of a company with a classified board, where directors may be removed only for cause.

Companies should review their organizational documents and ensure that supermajority voting requirements (e.g., to remove directors or to approve mergers or other significant transactions) are included in the company’s certificate incorporation.