Court of Chancery Invalidates Director Removal Provision in Corporate Bylaws

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.”