Harold Frechter v. Dawn M. Zier

Citation: Not availableDocket: CA 12038-VCG

Court: Court of Chancery of Delaware; January 23, 2017; Delaware; State Appellate Court

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Competing motions were presented regarding the validity of a corporate bylaw at Nutrisystem, Inc., which stipulated that directors could only be removed by a super-majority vote of at least 66.67% of all outstanding shares. This provision was found to conflict with Delaware law, specifically 8 Del. C. 141(k), which allows for director removal by a simple majority. Consequently, the court denied the Defendants' Motion to Dismiss and granted the Plaintiff's Motion for Summary Judgment on Count II, declaring the bylaw invalid. The Plaintiff withdrew Count I, which alleged breach of fiduciary duty against the directors for maintaining the unlawful bylaw. The Plaintiff, a shareholder of Nutrisystem, filed a Verified Class Action Complaint on February 24, 2016, asserting two counts against the Board, with Count II focusing on the bylaw's legality. Oral arguments were conducted on October 20, 2016.

Summary judgment is warranted when the moving party proves there are no genuine disputes regarding material facts, allowing for judgment as a matter of law. The Plaintiff's Motion for Partial Summary Judgment focuses on interpreting a section of the Delaware General Corporation Law (DGCL). It requires the Plaintiff to refute the presumption of the validity of the bylaws and show that the specific bylaw cannot be valid under any circumstances. The DGCL permits bylaws that do not conflict with the law or the corporation’s certificate of incorporation, as stated in Section 109(b). However, Section 141(k) allows for the removal of directors by a majority of stockholders, with exceptions not relevant here.

The Plaintiff argues that the questioned bylaw contradicts the law and is thus invalid under Section 109(b). The court must first determine if the statute is ambiguous; if not, its plain meaning applies. The court finds the bylaw inconsistent with Section 141(k). The Defendants contend that Section 216 allows for bylaws to set specific voting requirements for corporate decisions, arguing that Section 141(k) merely provides a permissive framework for director removal. They argue that nothing in Section 141(k) prohibits a supermajority requirement for removal, citing the absence of mandatory language in the statute. However, this interpretation is viewed as an unnatural reading of Section 141(k).

Holders of a majority of stock possess the discretionary power to remove directors but are not obligated to do so. The Removal Provision indicates that a simple majority of Nutrisystem stockholders cannot exercise this power, as it contradicts statutory requirements. The defendants’ interpretation of Section 141(k) suggests that a majority's ability to remove directors hinges on the bylaws, which undermines the statutory provision. This interpretation is inconsistent with recent judicial interpretations, notably a bench decision in In re VAALCO Energy, Inc. Stockholder Litigation, where the court affirmed that Section 141(k) allows removal of directors without cause by a majority of shares entitled to vote. Consequently, the court ruled that Section 141(k) explicitly grants a majority the power to remove directors, rendering any contrary bylaw invalid. The court denied the defendants' motion to dismiss, granted the plaintiff's motion for summary judgment regarding Count II, and acknowledged the withdrawal of Count I of the Complaint. An order was subsequently issued reflecting these decisions.