On January 10, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted a motion for judgment on the pleadings to plaintiffs, the CEO and another director of TradingScreen Inc., invalidating a written consent of the majority of common stockholders purporting to remove and replace the CEO and effect other changes to the board. The Court explained that Delaware law provides for the selection of officers as prescribed by a company’s bylaws or determined by the board and found that TradingScreen’s bylaws provide for the board to elect and remove officers. Therefore, the Court held the written consent was “ineffective.”
Defendants, majority holders of TradingScreen’s common stock, executed a written consent purporting to remove plaintiff Pierre Schroeder as the company’s CEO and to appoint defendant Philippe Buhannic as CEO and chairman of the board. Schroeder and another director filed suit for a declaratory judgment that the consent is ineffective in light of the company’s certificate of incorporation, bylaws, and a stockholders agreement executed by all of the company’s preferred and common stockholders.
The stockholders argued, among other things, that the Delaware action should be stayed in favor of a pending suit in New York, which was brought by the stockholders a year before the consent was executed and asserts various direct and derivative claims, including breach of fiduciary duty, against Schroeder and others. The Court rejected this argument and explained that Delaware General Corporation Law (“DGCL”) Section 225, 8 Del. C. § 225, allows the Court of Chancery to “hear and determine the validity of any election, appointment, removal or resignation of any director or officer of any corporation.” It thus facilitates efficient review of the corporate election process to prevent a corporation from being “immobilized by controversies about whether a given officer or director is properly holding office.” The Court noted that Delaware courts “typically will deny a motion to stay” an action under Section 225—notwithstanding a policy of otherwise deferring to prior pending actions on the same issues—because the policies underlying Section 225 “take precedence.” Furthermore, the Court found that the legal issues raised by the consent were distinct from those at issue in the prior pending suit.
As to the merits, the Court explained that DGCL Section 142(b), 8 Del. C. § 142(b), requires officers to be chosen as “prescribed by the bylaws or determined by the board of directors or other governing body.” The Court found that the company’s bylaws “render the changes [under the written consent] ineffective” because the bylaws provide that officers are elected or removed “by the board.” Thus, Schroeder could not be removed as CEO by the common stockholders. Further, the provision of the stockholders agreement requiring the stockholders to designate the board-appointed CEO as a director prevented the stockholders from removing Schroeder as a director. Because the written consent did not effectively remove Schroeder as a director, his board seat was not vacant and the appointment of Buhannic to replace him was ineffective. The Court also found additional actions set forth in the consent ineffective because of noncompliance with the stockholders agreement.