ADVERTISEMENTS

Postorivo v. AG Paintball, Civ. Act. No. 2991, Del. Ch., Feb. 29, 2008 is a relatively straightforward application of the Aronson/Rales standard for determining demand futility.  But it really illustrates what happens to dissident directors and the legal hurdles imposed by Delaware courts in challenging a dissident director's removal.  The message in the case is don't dissent. 

The more interesting aspect of the case is plaintiff's allegation that he was removed from the board in violation of the board's fiduciary obligations.  With respect to Aronson's second prong, the plaintiff contended that "his experience, reputation and industry contacts added value" to the company and that his removal was therefore improper.  The court summarily rejected the argument, labeling it "circular reasoning" and characterizing it as an argument based upon the "collective unwholesomeness" of the decision.   

When VC Strine wrote that "professional" independent directors would cave in the face of shareholder demands because of the threat of a withhold campaign, we noted that this was belied by the statistics:  Only one director had been subject to a successful campaign and that director's resignation had been refused by the board.  We further noted that in fact if directors wanted to maintain their sinecure on the board, they had greater incentive to kowtow to management since the only realistic way of being removed was to have the board refuse to renominate.  Postorivo shows what happens when a director is on the outs with management.  The board removes him.  Moreover, the case illustrates the ability (or inability) to seek recourse.  A director seeking to challenge removal must show that the board lacks independence, a claim unrelated to the alleged offense and one that confronts the usual evidentiary hurdles at the pleading stage.  As for showing that removal violated the board's business judgment, the Delaware courts will summarily dismiss the claims after an incantation of "circular reasoning."

The case illustrates that unpopular directors get removed by the board and there is not much that they or shareholders can do about it.  Directors who want to maintain their position must be solicitous not towards shareholders as VC Strine claims but to management.

We have posted the complaint and some of the briefs connected to the motion to dismiss on the DU Corporate Governance web site.

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