The Delaware Chancery Court’s recent opinion in Gorman v. Salamone, 2015 WL 4719681 (Del. Ch. Jul. 31, 2015), held that “Delaware law does not allow stockholders to remove directly corporate officers through authority purportedly conferred by a bylaw.” This decision reinforces the primacy of the board of directors in governing a Delaware corporation.
The plaintiff, John Gorman, was the majority stockholder of Westech Capital Corporation, and the defendant, Gary Salamone, was a board member and the CEO. After a series of efforts to take control of the board, Gorman acted by written consent to amend Westech’s bylaws to allow officers to be removed by a majority vote of the stockholders and to require the board to implement such removals. Gorman then removed Salamone as CEO and appointed himself instead. Salamone challenged Gorman’s actions at the next board meeting, and the board voted in favor of Salamone’s position. Gorman then asked the Delaware Chancery Court to declare that Salamone had been validly removed as an officer of the corporation.
The court noted that, while stockholders have broad power to adopt bylaws relating to the business of the corporation, such bylaws may not unduly interfere with the powers and duties allocated to the board of directors by Section 141(a) of the Delaware General Corporation Law, which establishes the “bedrock statutory principle of director primacy.” Essentially, the court held, bylaws may define the “process and procedures” by which business decisions are made, but they cannot dictate how the board should make “specific substantive business decisions.
The court ruled that Gorman’s bylaw amendment constituted interference with substantive business decisions and was therefore invalid. In making this decision, the court weighed heavily the fact that the bylaw would allow stockholders to compel the board to remove officers immediately, even if such removal might cause directors to breach their fiduciary duties. Additionally, the bylaw would allow stockholders to exercise “more than an advisory function” in the corporation’s governance.
By invalidating the bylaw in question, Gorman v. Salamone holds that stockholders may not enable themselves to remove officers of a Delaware corporation over the objection of the board of directors. Perhaps more importantly, this case reinforces the principle of director primacy and provides clear guidance about the balance of power between directors and stockholders that is enshrined in Delaware corporate law.