This case summary was prepared in large part by Brooke Elmi.
In Frechter v. Zier, the Delaware Court of Chancery held that a provision of the defendant corporation’s by-laws requiring a sixty-six and two-third percent (66 2⁄3%) vote to remove a director was invalid under the DGCL. Vice Chancellor Glasscock found that a corporate by-law requiring a vote by more than a simple majority of shares to remove a director was clearly inconsistent with the DGCL Section 141(k).
At issue in the case was a by-law provision requiring a sixty-six and two-thirds percent vote to remove a director. Under the corporate charter, the board of directors had the authority to “make and to alter or amend the By-laws.” In January 2016, the board of directors amended the by-law provision in question, striking a clause requiring that directors could only be removed “for cause,” but leaving the requirement of a two-third majority vote.
The plaintiff shareholder brought a shareholder class action against the Delaware Corporation. The plaintiff asserted the by-law was “inconsistent with law” and thus invalid under 8 Del. C. § 109(b).
DGCL Section 141(k) 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 an election of directors.” The defendants’ argument, based on legislative intent, urged that DGCL 141(k) was correctly interpreted as a modifiable default rule. The Vice Chancellor rejected defendants’ argument as an “unnatural reading” of an unambiguous statute, and cited a recent bench decision, In re VAALCO Energy, Inc. Stockholder Litigation, in which the Vice Chancellor held that a by-law provision that limited removal of board directors only “for cause” was precluded by the language of Section 141(k).
Key Points of Law:
- The court held that Section 141(k) is not “merely permissive.” It is mandatory.
- A bylaw that sets a “supermajority requirement for removal of directors” is inconsistent with Section 141(k).
- “Section 141(k) unambiguously confers on a majority the power to remove directors, and the contrary provision in the Company bylaws is unlawful.”