Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Delaware Chancery Court Holds That Corporations Cannot Enact Bylaws To Circumvent Simple Majority Vote Requirement For Shareholder Removal Of Directors<br >  
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  • Delaware Chancery Court Holds That Corporations Cannot Enact Bylaws To Circumvent Simple Majority Vote Requirement For Shareholder Removal Of Directors
     
    01/30/2017
    On January 24, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted summary judgment in favor of plaintiff, a shareholder of Nutrisystem, Inc., who sued Nutrisystem and its directors for declaratory judgment to invalidate a provision in Nutrisystem’s bylaws purporting to require a vote of two-thirds of the company’s shares before a director could be removed from the board.  Frechter v. Zier, C.A. No. 12038-VCG (Del. Ch. Ct. Jan. 24, 2017).  Specifically, the Court held that the supermajority requirement violated Section 141(k) of the Delaware General Corporation Law (“DGCL”), which permits removal of a director by a simple majority vote of shares.

    The litigation arose after Nutrisystem amended its director removal bylaw to state that a director can be removed only upon the affirmative vote of a supermajority of corporate shares.  Plaintiff filed a putative class action complaint against the company and the directors and moved for summary judgment on his request for declaratory judgment that the as-amended bylaw violated Delaware law.  Plaintiff relied on Section 141(k) of the DGCL, which provides that “[a]ny 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,” subject to two exceptions the Court noted were impertinent.  Defendants moved to dismiss, arguing the board was empowered to adopt the bylaw pursuant to DGCL Section 109(b)—which generally permits the adoption of bylaws not inconsistent with law or the certificate of incorporation—and Section 216 of the DGCL—which generally permits bylaws to specify the required vote for a transaction subject to other provisions of the DGCL. 

    Vice Chancellor Glasscock simultaneously denied defendants’ motion to dismiss and granted plaintiff’s motion for summary judgment, concluding that Section 141(k) prohibits the imposition by bylaw of a supermajority requirement for director removal because it is inconsistent with “the plain language of the statute.”  Vice Chancellor Glasscock added that defendants’ interpretation to the contrary would render Section 141(k) “an effective nullity.”  
    CATEGORY: Charters & Bylaws

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