Corporate Governance

Kurz v. Holbrook: Shareholder Voting, Omnibus Proxies, and the Role of DTC: Invalidating Director Disability Bylaws

By J Robert Brown Jr.

We are discussing Kurz v. Holbrook, 2010 Del. Ch. LEXIS 24 (Del. Ch. Feb. 9, 2010).

One issue in the case was whether shareholders could adopt a bylaw that would reduce the size of the existing board from seven directors to three, effectively forcing off the board as many as four incumbent directors (because there were two vacancies and only five incumbents the bylaw actually threatened to unseat two directors).  The effect of the bylaw was to remove existing directors.

VC Laster struck down the bylaw, concluding that it conflicted with Section 141(b) of the Delaware General Corporation Law.  The Section provided that directors would hold office "until such director's successor is elected and qualified or until such director's earlier resignation or removal."  Removal, in turn, was set out in Section 141(k), which gave shareholders the right to remove directors, with or without cause, by majority vote.   

A sound enough conclusion (for reasons we will note in a later post), VC Laster used some unnecessary analysis that raise questions about existing practice.  He arrived at his conclusion by determining that Section 141 provided the exclusive means of removing directors.  The Section only explicitly allowed for removal by shareholders.  Because the bylaw added an additional form of removal, it violated the exclusive nature of Section 141. 

In reaching this conclusion, the opinion discussed whether in fact Section 141 was the exclusive method of removing directors.  VC Laster conceded that directors could be removed by reason of death, a form of removal not considered by Section 141.  Nonetheless, it was an exception that proved the rule.  As he noted:  "death is a not procedural means by which a director's term can be brought to a close under a corporation's constitutive documents and the DGCL. To impose death on a director is not a legitimate method of effecting board change. It is a felony."

True enough but he failed to address bylaws, which seem common enough, that provide a director will be removed if disabled.  See Bylaws of JetBlue ("Any person elected to a newly-created director position or any person elected to fill a vacancy on the Board of Directors shall serve until the next annual meeting of stockholders and until a successor has been elected and qualified, subject to such director's prior death, disability, resignation, retirement, disqualification or removal from office."). 

While disability may, like death, seem involuntary, it puts in the hands of existing directors considerable discretion to determine the onset of disability.  This is particularly true where the bylaws (and the statute) do not define disability.  By concluding that Section 141 is exclusive, VC Laster has at least raised doubts about every bylaw that provides for mandatory replacement upon a director becoming disabled.

The opinion and a number of primary materials are posted at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on March 10, 2010 (boomark / email).