October 21, 2016

Delaware: Mootness Fee for Repeal of Misleading Bylaw

This Fox Rothschild blog discusses the Chancery Court’s decision in Frechter v. Cryo-Cell International, where it awarded a “mootness” fee in a case involving faulty language about removal of directors in a corporate bylaw. This excerpt summarizes the issue:

The bylaw provision at issue indicated that directors could be removed “for cause” at a “special meeting” of stockholders.  The plaintiff asserted that under Section 141(k) of the Delaware General Corporation Law, stockholders have the right to remove directors without cause, and thus the provision was unlawful.

After a motion for summary judgment was filed, the company amended its bylaws to remove the language, which mooted the case.  The court found that the bylaw was misleading – but since the potential harm was mostly theoretical & there was no proxy contest pending, the court awarded a fee of only $50,000.

In recent years, many public companies have moved from staggered boards – where removal only for cause is okay under Delaware law – to a single class of directors, where it’s not.  It was only in 2015 that the Chancery Court  invalidated bylaw provisions like the one at issue here, so the case is a reminder for companies that recently de-classified their boards to check their bylaws.  It’s also a reminder that it will be cheaper to address any flawed provisions that companies find before they’re in the heat of a proxy contest.

John Jenkins