In a case of first impression, the Delaware Court of Chancery recently struck down a provision contained in the bylaws of a Delaware corporation authorizing the corporation’s stockholders to remove a corporate officer (in the underlying case, the provision had been invoked to remove the CEO) with or without cause, requiring the board to implement that removal without discretion.
Among other reasons for invalidating the bylaw, the Court of Chancery noted that:
- the challenged bylaw did more than simply dictate how officers would be appointed and removed (that is, it was more than merely procedural); rather, it permitted the stockholders to remove and replace officers without cause, thereby allowing them to make substantive business decisions for the corporation;
- the stockholders’ ability to remove officers for any (or no) reason unduly constrained the board’s ability to manage the corporation -- conceivably, exercise of the removal right would obligate the board to effectuate the removal even where the directors determined that the corporation would be best served otherwise; and
- a bylaw cannot mandate board action in circumstances that a proper application of fiduciary principles could preclude.
In this regard, the Gorman
decision reinforces the board-centric corporate construct envisioned by the Delaware General Corporation Law, in particular, 8 Del. C. §§ 141 et seq. (delineating, among other things, the managerial and oversight responsibilities of Delaware boards) and § 142 (regarding the appointment, role and tenure of officers).
Polsinelli is monitoring these and other developments in Delaware business law, and will furnish updates on significant developments in future e-alerts. For more information, please contact the authors or your Polsinelli attorney.