DELAWARE CHANCERY CASE HAS SIGNIFICANT IMPLICATIONS ON USE OF SUPERMAJORITY PROVISIONS WITH DELAWARE CORPORATIONS

A recent case from the Delaware Chancery Court has cast doubt on the validity of bylaws containing supermajority voting requirements on items where Delaware’s General Corporation Law (“DGCL”) contains a specific voting threshold.

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

In Frechter v. Zier, C.A. No. 12038-VCG (Del. Ch. Ct. Jan. 24, 2017), a shareholder of Nutrisystem, Inc. sued the company and its directors for declaratory judgment to invalidate a provision in Nutrisystem’s bylaws requiring a vote of two-thirds of the company’s shares before a director could be removed from the board.

The 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” (with certain exceptions that were not applicable). Defendants argued that the board was empowered to adopt the bylaw pursuant to DGCL Sections 109(b) and 216 of the DGCL —which provide for, respectively, the adoption of bylaws not inconsistent with law or the certificate of incorporation, or bylaws specifying the required vote for a transaction subject to other provisions of the DGCL.

Chancery Court Chancellor & Plaintiff Agree

The Chancery Court Chancellor agreed with plaintiff, concluding that Section 141(k) prohibits any bylaw requiring a supermajority vote for director removal because any such requirement would be inconsistent with “the plain language of the statute.”  The Chancellor added that any contrary interpretation would render Section 141(k) “an effective nullity.”

This opinion has significant implications for any bylaw provision requiring supermajority shareholder votes for any item for which the DGCL provides a specific voting threshold. Corporations should consider removing any such supermajority voting requirements from their bylaws and instead placing them in the certificate of incorporation.

Placement of supermajority provisions in the certificate of incorporation is preferable because Section 102(b)(4) of the DGCL permits a corporation to include in its certificate of incorporation “

Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power . . . than is required by this chapter.” The DGCL has no similar provision with respect to bylaws.