Delaware Ruling Spurs Rush to Change Board-Removal Clauses

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By Che Odom and Michael Greene

Feb. 22 — Companies are scrambling to amend corporate provisions in the wake of a Delaware Chancery Court ruling that directors in companies without classified boards may be removed without cause, despite what their charters or bylaws say.

As of Feb. 23, at least 25 companies have said they either plan to adopt amendments to comply with the Dec. 21 bench ruling or have already done so.

Attorneys told Bloomberg BNA that the opinion will spur more amendments and may even give some entities additional reason to choose another corporate structure.

Laster's Opinion

Vice Chancellor J. Travis Laster, ruling in In re Vaalco Energy Shareholder Litigation, said that approximately 175 Delaware companies with non-classified boards have charter or bylaw provisions that allow removal of directors “only for cause” . Such provisions are invalid as a matter of Delaware law, Laster ruled.

In the Vaalco lawsuit, investors claimed that under Delaware General Corporation Law Section 141(k), a majority of stockholders have a right to vote to remove directors without cause unless the corporation has a classified board or cumulative voting .

Gardner Davis, partner and corporate lawyer in the Jacksonville, Fla., office of Foley & Lardner LLP, told Bloomberg BNA in a Feb. 23 interview that the provisions at issue probably are inadvertent leftovers from when these companies had classified boards.

“In my opinion, this is just ‘corporate cleanup,'” Davis said.

‘Little Recourse.'

Bruce Toth, a partner in Chicago-based Winston & Strawn LLP's corporate department, said companies should get rid of such language to comply with Vaalco.

“In light of the decision, you have little recourse but to amend or make a public statement that you're not going to enforce it, although I would certainly advise you to amend it,” Toth, author of Bloomberg BNA's The Board of Directors portfolio, said in an interview Feb. 23.

Although Laster issued his opinion from the bench, the ruling should be treated with the same weight as a full, written decision, and companies probably should react sooner rather than later, Toth added.

Acting Quickly for Defense

Quick reaction to Laster's opinion can make the difference when defending against a shareholder lawsuit, Toth continued. “You're going to get inquiries from the plaintiffs' bar,” he said.

Shareholders of at least two companies, Erin Energy Corp. and Mueller Industries Inc., have filed suit this year in the chancery court over “only for cause” provisions. The Mueller suit was voluntarily dismissed Jan. 25 after its board amended its provision Jan. 15.

Companies that are further along in the process will have a better defense that they have already initiated action, which can minimize or eliminate costs from such inquiries, Toth said.

Choice of Entity

Some observers suggest that the ruling may make Delaware less business-friendly.

The opinion is another move by the court away from the precept of “freedom to contract,” Debbie Hoffman, in-house chief legal officer at Digital Risk LLC and head of the company's compliance and governance duties, told Bloomberg BNA in an interview Feb. 23.

The precept is one that has “set Delaware apart as a jurisdiction with the broadest grant of power to set the terms of a company's governance,” she said.

The opinion adds a “mandatory provision into governance documents” that will not apply to limited liability companies or limited partnerships, which may grow in favor among businesses as a result of such decisions, she said.

Alternatives Not Likely

The Vaalco opinion presents an interesting question for companies about whether to opt in to the “for cause” removal limitation, Davis said.

Companies could decide to adopt cumulative voting, but that would enable dissident shareholders an easier way to obtain board representation, Davis said. They also could adopt a classified board, which would be “going against the trend,” he added.

Another option may be to “adopt charter provisions requiring a supermajority shareholder vote to remove directors, which would almost certainly draw opposition from the proxy advisory firms,” he said.

All of those options are not likely, Davis added.

By Che Odom and Michael Greene

To contact the reporter on this story: Che Odom in Washington at codom@bna.com; Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

Companies Reacting to `Vaalco' Opinion

Company Industry Headquartered Reaction
PetroQuest Energy Inc. Energy Lafayette, La. Board amended bylaws Feb. 19 to comply.
Peabody Energy Corp. Energy St. Louis, Mo. Company said Feb. 18 it will not enforce its provision and will seek to amend its charter at its annual meeting.
Intercept Pharmaceuticals Inc. Pharmaceuticals New York Board amended bylaws Feb. 10 to comply.
Medidata Solutions Inc. Computers New York Board amended bylaws Feb. 11 to comply.
Inteliquent Inc. Communications Chicago, Ill. Board decided Feb. 9 to put before stockholders a charter amendment at next annual meeting.
Quantum Corp. Computers San Jose, Calif. Board amended bylaws Feb. 3 to comply.
AtriCure Inc. Health Care West Chester, Ohio Board amended bylaws Feb. 3 to comply.
Support.com Inc. Computer Redwood City, Calif. Board amended bylaws Feb. 5 to comply.
Alliance Data Systems Corp. Financial Services Plano, Texas Company said Jan. 26 it will not enforce its provision and will seek to amend its charter at its annual meeting.
NorthWestern Corp. Energy Sioux Falls, S.D. Company said Jan. 29 it will not enforce its provision and will seek to amend its charter at its annual meeting.
Sequenom Inc. Biotechnology San Diego, Calif. Company said Jan. 26 it will not enforce its provision and will seek to amend its charter at its annual meeting.
Vringo Inc. Communications New York Board amended bylaws Jan. 26 to comply.
Lifetime Brands Inc. Consumer Goods Garden City, N.Y. Board amended its bylaws Jan. 26 to comply with the opinion.
Mueller Industries Inc. Materials Memphis, Tenn. Board amended bylaws Jan. 15 to comply.
Amphenol Corp. Electronics Wallingford, Conn. Company said Jan. 14 it will not enforce its provision and the board adopted a resolution on amending the charter to put before stockholders at next annual meeting.
NRG Yield Inc. Energy Princeton, N.J. Company said Jan. 26 it will not enforce its provision and the board adopted a resolution on amending the charter to put before stockholders at next annual meeting.
Dr. Pepper Snapple Group Inc. Beverages Plano, Texas Board amended its bylaws Jan. 23 to comply with the opinion.
Equinix Inc. Real Estate Redwood City, Calif. Board amended its bylaws Jan. 13 to comply with the opinion.
Pzena Investment Management Inc. Financial Services New York Board amended its bylaws Jan. 15 to comply with the opinion.
Innoviva Inc. Pharmaceuticals San Francisco, Calif. Board amended its bylaws Jan. 15 to comply with the opinion.
Comfort Systems USA Inc. Construction Houston Company said Jan. 15 it will not enforce its provision and will seek to amend its charter at its annual meeting.
Tessera Technologies Inc. Semiconductors San Jose, Calif. Board amended its bylaws Jan. 9 to comply with the opinion.
Vitamin Shoppe Inc. Retail Secaucus, N.J. Board amended its bylaws Jan. 11 to comply with the opinion.
Regulus Therapeutics Inc. Pharmaceutical Carlsbad, Calif. Company said Jan. 8 it will not enforce its provision and will seek to amend its charter at its annual meeting.
Vaalco Energy Inc. Energy Houston Board amended its bylaws Dec. 23 to comply with the opinion.