The Delaware Chancery Court recently held that directors in companies without classified boards may be moved from office without cause irrespective of the provisions of a company’s corporate charter. This ruling should encourage companies to review their bylaws and amend these bylaws as necessary.
A significant amount of Delaware companies have non-classified boards with bylaw provisions that only allow removal of directors ‘for cause.’ The Delaware Chancery Court reasoned that these provisions were not valid under Delaware law. In in re Vaalco Energy Shareholder Litigation, the court held that under Delaware General Corporation Law Section 141(k), a majority of stockholders have a right to remove directors without cause unless the corporation has a classified board or cumulative voting.
This ruling may present Delaware as a less friendly place to do business. However, this mandatory removal provision will not apply to limited liability companies or limited partnerships. Further, this ruling will not apply to companies that decide to adopt cumulative voting or companies that adopt a classified board.
