In a bench ruling, the Delaware Court of Chancery held that a charter provision or by-law purporting to require a showing of cause for stockholders to vote to remove directors from non-classified boards is invalid under Section 141(k) of the DGCL (In re VAALCO Energy, Inc., S'holder Litig., Consol. C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015) (TRANSCRIPT)). The court interpreted the statute as a blanket rule that requires that directors on non-classified boards be removable by the stockholders with or without cause, with no exceptions other than those delineated in the statute. Corporations with staggered boards can continue to require in their certificate of incorporation or by-laws that stockholders show cause to remove directors.

The case arose from a consent solicitation launched by an activist stockholder of VAALCO Energy, Inc., who sought to remove four directors from the board of VAALCO. The board of VAALCO was not staggered during the solicitation, but it once had been. As is common for companies with staggered boards, the company's charter and by-laws provided that incumbent directors not up for reelection could only be removed for cause, even by stockholder vote. For an example of such a by-law provision, see Standard Clause, Certificate of Incorporation: Staggered Board Provision: Section 2(d).

In 2009, the stockholders of VAALCO voted to declassify the board of directors. However, the board did not allow the stockholders to vote to repeal the removal provisions, but purported to keep the provisions in place, in spite of the fact that the board was no longer classified (background facts taken from the plaintiffs' brief at In re VAALCO Energy, Inc., S'holder Litig., (Del. Ch. Dec. 14, 2015) (Trial Motion, Memorandum and Affidavit)). The plaintiffs argued in VAALCO Energy that the board's decision to block the vote was irrelevant because a vote to repeal the provisions was not necessary as a matter of Delaware statutory law, once the board was declassified.

In a ruling from the bench, Vice Chancellor Laster granted the plaintiff's motion for summary judgment. The court held that the holdover charter and by-law provisions were in direct conflict with Section 141(k) of the DGCL and therefore invalid.

The court read the plain language of Section 141(k) as establishing a hard-and-fast rule under which any director can be removed, with or without cause, by majority vote, subject to only two exceptions:

As long as neither of these exceptions applies to the company in question, the directors are removable with or without cause. The court acknowledged that this rule is not driven by any particular policy rationale and that an argument could be made to allow limits to removal only for cause even with declassified boards. Nevertheless, the court considered the language of the statute clear and not open to modification in a corporation's charter or by-laws. The court added that Section 141(k) has been interpreted this way in treatises and by the court as far back as its decision in Rohe v. Reliance Training Network, (Del. Ch. July 21, 2000).

The court was also unmoved by the argument that the decision to invalidate VAALCO's removal provisions would upset market expectations. The court recognized that approximately 175 public companies have similar provisions, which the court characterized as a result of "people not reading the statute" and no excuse to uphold the provisions.

As a result of the decision in VAALCO Energy (which will not be appealed, as the parties settled), companies with declassified boards and plurality (not cumulative) voting should review their charter and by-laws to determine whether they are mistakenly relying on removal-for-cause provisions. Though they do not necessarily have to take action to amend these unenforceable provisions, these companies should consider doing so preemptively rather than being litigated into doing so (and potentially having to pay the plaintiff's attorney fees). Furthermore, in light of the invalidity of these provisions, companies should review their entire corporate-defense profile to determine their vulnerability to hostile maneuvers.

Similarly, companies with plurality voting and staggered boards that are considering declassifying (a favored position of proxy advisory firms) should be aware that any removal-for-cause provisions that they have in place, and that they had expected to rely on, are in fact unenforceable.

The court did not address the question of whether a charter or by-law provision requiring a supermajority vote to remove directors would conflict with Section 141(k). On its face, and particularly in light of the VAALCO Energy court's emphasis on the plain language of the statute, Section 141(k) would seemingly invalidate any provision calling for a supermajority vote to remove directors from a declassified board. However, Section 102(b)(4) of the DGCL authorizes Delaware corporations to use the certificate of incorporation to require voting approval by a larger portion of the stock than is otherwise required by the statute. On that basis, provisions requiring a supermajority vote to remove directors (at least if contained in the charter) should remain valid under Delaware law.