In Gorman v. Salamone, C.A. No. 10183-VCN (Del. Ch. July 31, 2015), the Court of Chancery affirms the board-centric foundation of Delaware corporate law, and describes the limitation on the ability of a majority stockholder to appoint officers directly–even though a majority stockholder might have the ability to appoint board members. In sum, the majority stockholder must use her power to appoint at least a majority of board members (absent a voting agreement or other restrictions in derogation of the default rule), as the admittedly indirect manner by which she might hope to control who the officers of the corporation will be.
To put a sharper point on it, one of the key roles of a board is to appoint the officers of a corporation. Thus, the court invalidated a bylaw amendment that the majority stockholder purported to authorize, to the extent the majority stockholder attempted to usurp the board’s role.
There are many quotable excerpts from this opinion that is the latest in a series of Delaware decisions involving a struggle for control of Westech Capital Corp., and in particular, a fight pursuant to DGCL section 225 over who the proper members of the board are. See In re Westech Capital Corp., 2014 WL 2211612 (Del. Ch. May 29, 2014), reversed in part by Salamone v. Gorman, 106 A.3d. 354 (Del. 2014). The Supreme Court decision was highlighted briefly on these pages. That decision should be consulted for background facts, in addition of course, to the facts in the current opinion which largely focus on events that occurred after the Supreme Court opinion.
For present purposes, the following bullet points may entice the interested corporate litigator to read the whole opinion, which invalidated written consents based on the stricken bylaw.
- stockholders may not remove directly corporate officers–and a bylaw that purports to confer such authority would improperly interfere with one of the most important functions of the board of directors
- DGCL section 142(e) provides that any corporate vacancy shall be filled as the bylaws provide, but in the absence of such provision, the vacancy shall be filled by the board of directors
- stockholders do not have unlimited power to amend bylaws, and their ability to do so is not coextensive with the board’s concurrent power. Moreover, DGCL section 141(a) grants prerogatives to the board that limit the power of stockholders to interfere with board powers. See also DGCL section 109
- Money quotes are provided on page 12 and footnote 25 that describe the “director primacy” theory of Delaware corporate law which prohibits the stockholders from directly managing the business and affairs of the corporation–without specific authority in either the statute or the certificate of incorporation.
- Thus, bylaws may not control specific substantive (as opposed to procedural) business decisions.
- If a majority stockholder wants to appoint or remove a corporate officer, she must do so only through her ability to appoint board members. Otherwise, she would compromise the board’s core functions and duties–which include appointment of corporate officers. See footnote 35.
Status Quo Orders
- Status quo orders are common in Section 225 battles for board composition, but such an endeavor may be akin to “musical chairs” to the extent it may not be predictable who the court will temporarily maintain in place as a board member. For example, is it the board who was seated “just before the music stopped” or “after the music stopped”, if the “music stopping” is akin to who filed suit asking for the status quo order–or who took unilateral self-help action just before filing suit.
- The prerequisites for obtaining a status quo order, which are close cousins to the prerequisites for a TRO or related injunctive relief, are itemized on page 20 and noted in footnote 49 and 51
UPDATE: The “father” of the director primacy theory of corporate law, Professor Stephen Bainbridge, who has published extensively on the topic, provides commentary about this case and its reference to his theory. As readers will recall, Prof. Bainbridge is often cited in corporate decisions of Delaware courts, but curiously he was not cited in the instant ruling.
SUPPLEMENT: In my column for Directorship magazine, the publication of the National Association of Corporate Directors, I wrote more about this court decision.