United States: But Everybody's Doing It: Delaware Chancery Court Invalidates VAALCO's "Wacky" Charter And Bylaws Provisions Despite Use By Other Companies

Ruling from the bench on dueling motions for summary judgment just days before a special meeting of shareholders was to be held, on December 21, 2015, Delaware Vice Chancellor J. Travis Laster invalidated certain provisions in VAALCO Energy, Inc.'s ("VAALCO") certificate of incorporation and bylaws (the "Charter and Bylaws Provisions").  The litigation and ruling stem from investor attempts to remove a majority of VAALCO's Board.  VAALCO argued that the Charter and Bylaws Provisions prevented investors from removing board members without cause.  Vice Chancellor Laster disagreed, holding that these provisions, in purporting to restrict stockholders' ability to remove directors without cause in the absence of a classified board or cumulative voting provision, violated Delaware corporate law.  The ruling is a cautionary note for a small percentage of Delaware corporations that apparently still have similar provisions on their books.

As with many disputes between management and shareholders, this one began with a large stock-drop—VAALCO's share price declined nearly 80 percent from September 2014 to September 2015.  Unhappy with the company's performance, a group of investors that collectively owned 11 percent of VAALCO's shares ("Group 42") filed their initial Schedule 13D with the SEC, announcing the possibility that they would seek changes in VAALCO's Board and senior management.  The very next day, the Board adopted various defensive measures, including a poison pill to prevent Group 42 from acquiring any more VAALCO shares.  Weeks later, Group 42 made good on its promise by announcing its intention to remove and replace four of VAALCO's seven board members.  Group 42 explained at the time that its actions were authorized under Delaware General Corporation Law Section 141(k), which provides that directors may be removed with or without cause, unless the corporation has a classified board or cumulative voting; VAALCO had neither.

In response, VAALCO pointed to the Charter and Bylaws Provisions, which provide that VAALCO directors can only be removed for cause.  These provisions, however, were adopted when its Board was classified—and shareholders voted to un-classify the Board in 2009.  When shareholders unclassified the VAALCO Board six years ago, there was no accompanying vote to eliminate the Charter and Bylaws Provisions.  Consequently, VAALCO's charter was in conflict with Delaware law:  after 2009, VAALCO was governed by an unclassified board of directors—i.e., a board where directors may be removed with or without cause under DGCL 141(k)—but with charter and bylaws provisions providing that directors could only be removed with cause.  Something had to give, and according to Vice Chancellor Laster, that something was VAALCO's Board.

Rejecting VAALCO's argument that DGCL 141(k) did not create a mandatory rule prohibiting for-cause limitations on director removal from unclassified boards, Vice Chancellor Laster held that the plain language of the statute—which includes just two exceptions, neither of which applied to VAALCO—means that investors can remove directors from unclassified boards, with or without cause.  As Plaintiffs argued, "[t]he statutory use of specific exceptions matters."  The statute has two exceptions, VAALCO fit neither, and it was thus difficult for VAALCO to argue that the statute was still not a mandatory prohibition on for-cause limitations concerning unclassified boards like VAALCO's.

Finally, Vice Chancellor Laster rejected VAALCO's argument that "an external indicator" that the Charter and Bylaws Provisions were lawful was that several other Delaware corporations had similar provisions in their governing documents.  VAALCO argued that a ruling against VAALCO would have the "Court effectively rewrite the charters and bylaws of each of these 175 other companies."  Vice Chancellor Laster observed that an argument that "all the other kids were doing it" was not persuasive, and the possibility that 175 other companies might have "wacky" provisions in their charters would not save VAALCO's provisions.

While VAALCO announced just two days later that it had reached an agreement with Group 42 wherein certain board members would retire, the 175 or so Delaware corporations with what Vice Chancellor Laster termed "wacky" provisions should consider revisiting their charters and bylaws before their investors force the issue in a time of crisis.

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