Klaassen v. Allegro Dev. Corp., No. 583, 2013 (Del. Mar. 14, 2014)
In this en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s finding that a CEO’s claim asserting improper removal was equitable in nature and therefore, at most, voidable and subject to the equitable defenses of laches and acquiescence. The Court further held that the CEO acquiesced in his removal and therefore was barred from challenging the board’s action.
Eldon Klaassen (“Klaassen”) had been the majority stockholder and CEO of Allegro Development Corporation (“Allegro”) since the company was founded in 1984 through 2012. Starting in 2007, Allegro began to fall short of its financial projections, including a “disastr[ous]” fourth quarter in 2011 and a “similarly disappointing” first quarter in 2012. Allegro’s chief operating officer and chief marketing officer resigned, both citing difficulty working with Klaassen. In 2012, the board began to discuss replacing Klaassen as CEO. After several discussions, the board decided to replace Klaassen and appoint Raymond Hood (“Hood”) as interim CEO at a regularly scheduled board meeting. After his removal, Klaassen offered to help Hood in his new role and negotiated a consulting agreement with Allegro. Klaassen was later appointed to the company’s audit and compensation committees.
A little over seven months after his removal, Klaassen filed an action in the Court of Chancery seeking a declaration, among other things, that he was the lawful CEO of Allegro. He claimed his removal was invalid because the board did not provide him advance notice of the plan to terminate him and because the board employed deception in their decision to terminate him. The Court of Chancery held that the CEO’s claim was grounded in equity and thus was subject to equitable defenses. The Court of Chancery further held that Klaassen’s claim was barred by the equitable doctrines of laches and acquiescence.
On appeal, the Delaware Supreme Court held that the directors did not violate any notice requirements because Klaassen was terminated at a regular board meeting. Corporate directors are not required to provide notice of regular board meetings. There is also no requirement that the board provide advance notice of the specific agenda items to be discussed at those regular board meetings. Klaassen also argued that the multiple conversations between the board members prior to the regular board meeting constituted special meetings and therefore advance notice should have been given. The Court rejected this argument and held that his termination occurred at a regular meeting and not a special meeting. Further, the board took no official action before the regular board meeting and, as such, no advance notice of specific agenda items was required.
The Court then addressed Klaassen’s argument that the board’s action was invalid because the directors employed deceptive tactics in his removal. Klaassen claimed that the board gave him false reasons for rescheduling the regular board meeting to a later date, and that they provided a false explanation for why the company’s general counsel attended the board meeting. The Court did not reach the merits of those claims because Klaassen’s claims were based on alleged violations of general notions of fairness and as such were, at most, voidable and subject to equitable defenses. The Court therefore held that the Court of Chancery correctly found that Klaassen’s claims were barred by the doctrine of acquiescence.
In analyzing the Court of Chancery’s findings, the Court set forth the elements of an acquiescence defense and noted that conscious intent to approve the act is not required to prove that a claimant acquiesced. The narrow question is only whether the conduct amounted to recognition and acceptance of the act. Klaassen argued on appeal that several of his actions negated the trial court’s determination of acquiescence. These actions included Klaassen’s warning of possible litigation when making a presentation to purchase Series A Preferred shares from investors, Hood commenting that Klaassen had not “accepted his fate,” and the assertion that the negotiation of his consulting agreement was merely a ploy to remain involved in Allegro. The Court rejected those arguments and found that Klaassen’s conduct objectively evidenced the fact that he was no longer Allegro’s CEO. In making that determination, the Court noted that Klaassen (i) helped the new CEO transition into his new role and negotiated a consulting agreement where he agreed not to hold himself out as an Allegro employee or agent, (ii) proclaimed that Hood, as the new CEO, was responsible for Allegro’s performance, and (iii) circulated and executed a written consent removing Hood from the audit committee, given his new role as CEO, and appointing himself to the audit and compensation committees.
Since the Court found that Klaassen acquiesced to his removal, the Court did not reach or address the issue of laches.