Supreme Court Affirms Ouster of CEO Based on Acquiescence

Klaassen v. Allegro Development Corp., No. 583, 213 (Del. March 14, 2014)

Why this case is Important:  This case upheld a decision of the Court of Chancery that applied the equitable defense of acquiescence to bar a challenge by a CEO, who was ousted by a board despite having voting control and despite the board not giving him prior notice that his ouster was on the agenda.  This decision and the two trial court opinions are must reading for those board members who seek to remove a CEO who has voting control.

The Chancery decisions in this case were highlighted on these pages here.  This case involved a stockholders agreement that guaranteed investors certain seats on the board which played an important role in the analysis, as well as the provisions in the certificate of incorporation and bylaws.

Important highlights from this decision include the following:

1)         It is settled Delaware law that corporate directors are not required to be given notice of regular board meetings.  See footnote 57.  Thus there is no requirement that directors be given advance notice of a specific agenda item to be addressed at a regular board meeting.

2)         The Delaware Supreme Court overruled the following four Chancery decisions “to the extent that those decisions can fairly be read to hold that board action taken in violation of an equitable rule is void.”  Those decisions are Koch v. Stearn; VGS, Inc. v. Castiel; Adlerstein v. Wertheimer; and Fogel v. U.S. Energy Systems, IncSee footnote 78.

3)         Although directors are entitled to advance notice for special meetings, the court determined that no official board action was taken at special meetings when the ouster of the CEO was discussed, and that final action was not taken until the regular meeting.

4)         Based on the claim that the CEO was deceived by the defendant directors regarding what they intended to do at the meeting, the court deemed that to be an equitable claim.  Thus, the alleged violations of the equitable obligations of board members would make those actions taken, at most “voidable,” and subject to equitable defenses.

5)         See footnote 70 for comparison of a legal claim based on a statute or a contract, as compared to an equitable claim based on a duty such as fiduciary obligations.

6)         The court distinguished between void and voidable acts, explaining that a voidable act is one which “may be found to have been performed in the interest of the corporation but beyond the authority of the management,” as distinguished from a void act which is “ultra vires, fraudulent” or a waste of corporate assets.  See footnote 75 (expressing no comment on the distinction made by the Court of Chancery which the court described as a new rule established by the trial court which was not necessary for the Supreme Court to address).

7)         The court described the elements of acquiescence, when a claimant is deemed to have acquiesced in an act complained of, where he:

has full knowledge of his rights and the material facts and (1) remains inactive for a considerable time; or (2) freely does what amounts to recognition of the complained of act; or (3) acts in a manner inconsistent with the subsequent repudiation, which leads the other party to believe the act has been approved.

See footnote 79.

For the defense of acquiescence to apply, the court explained that:  “conscious intent to approve the act is not required, nor is a change of position or resulting prejudice.”  See footnotes 80 and 81.