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Frechter v. Zier, C.A. No. 12038-VCG (Del. Ch. Jan. 24, 2017) (Glasscock, V.C.)

January 24, 2017

In this memorandum opinion, the Court of Chancery granted a motion for partial summary judgment to a plaintiff seeking a declaratory judgment that a bylaw provision requiring a super-majority stockholder vote to remove a director was in violation of Section 141(k) of the General Corporation Law of the State of Delaware (the “DGCL”).

The plaintiff, a stockholder of defendant, Nutrisystem, Inc. (the “Company”), filed a class action lawsuit in February 2016 alleging that a director removal provision in the Company’s bylaws was unlawful.  The challenged bylaw provision provided that, except as otherwise required in the Company’s certificate of incorporation, the directors of the Company may only be removed by a vote of at least 66 2/3% of the voting power of all outstanding shares of the Company (the “Removal Provision”).

The Court began its analysis by noting that Section 109(b) of the DGCL affords a board of directors broad discretion to adopt bylaws not inconsistent with the law or the corporation’s charter.  The Court proceeded to explain, however, that Section 141(k) of the DGCL limits this broad discretion with respect to removal provisions by providing that “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 not applicable to this case. 

The Company argued that Section 141(k) is merely permissive and that the Removal Provision is therefore lawful under Section 216 of the DGCL, which permits a company to set voting requirements for actions if such voting requirements are not contrary to any provision of the DGCL.  Specifically, the Company argued that if the intent of the General Assembly were to make the removal provisions of Section 141(k) mandatory, they would have drafted Section 141(k) to state that directors “shall” or “must” be removed by a majority stockholder vote.  By using the word “may,” the Company argued, Section 141(k) gives corporations the freedom to adopt bylaws setting more lenient or stringent requirements than a simple majority vote for director removal.  The Court rejected this argument, holding that Section 141(k) affirmatively grants stockholders the power to remove directors by a majority stockholder vote—a power which, in accordance with the language of Section 141(k), they may or may not choose to exercise—and because the Removal Provision would deprive the Company’s stockholders of this power, the Removal Provision was inconsistent with Section 141(k).

The Court further noted that the Company’s reading of Section 141(k) was inconsistent with the Court’s bench ruling in In re VAALCO Energy, Inc. Stockholder Litigation, C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015) (TRANSCRIPT), wherein Vice Chancellor Laster found that the language of Section 141(k) stating that directors “may” be removed with or without cause prohibits bylaws requiring cause for removal.  In so holding, Vice Chancellor Laster highlighted that Section 141(k) states affirmatively that a director may be removed with or without cause by holders of a majority of the shares entitled to vote.  The Court therefore concluded that the Removal Provision was unlawful, finding that it was inconsistent with both statutory law and instructive case law.

The full opinion is available here