This post was prepared by an Eckert Seamans attorney.
The Delaware Court of Chancery preliminarily resolved a board composition conflict arising under DGCL §225 during a hearing to impose a status quo order. In Master Com Group Holding USA, Inc. v. Ribeiro, C.A. No. 2017-0406-SG, (transcript)(Del. Ch. June 14, 2017), Vice Chancellor Glasscock imposed several disputed conditions upon an otherwise agreed to status quo order.
Background: Defendants, disaffected stockholders of a start-up corporation, sought greater board representation and challenged Plaintiffs, including the principal stockholder and CEO of the corporation, with respect to other governance issues and expenditure limits. In order to keep the company operational, the parties negotiated a status quo order during the pendency of the case, but left some key, unresolved terms for the Court to decide.
Plaintiffs proposed a five member board, with Plaintiffs appointing three members, and Defendants appointing two. Defendants counter-proposed a six member board, with three appointees per side. In addition, Defendants sought a provision reducing the threshold for board approval of certain expenditure limits, including the CEO’s compensation and various consultant fees.
Result: Vice Chancellor Glasscock imposed a six member board, with three appointees per side. Noting the potential for board deadlock with an even number of directors, the Court ruled that the even-split composition was limited for the time being to the period leading up to trial. The Court also noted that it could revisit the composition issue in the event of a deadlock, or other form of governance impasse.
The Court also maintained the existing expenditure threshold limits, finding that the even board composition strengthened Defendants’ ability to oversee the Plaintiff CEO’s actions.
Take away: The Court of Chancery will not always avoid the potential for board deadlock on a temporarily-appointed board as part of a status quo order.