Securities Regulation Daily Requirement of supermajority vote to oust Nutrisystem directors violates DGCL
Wednesday, January 25, 2017

Requirement of supermajority vote to oust Nutrisystem directors violates DGCL

A corporate bylaw provision allowing shareholders to remove directors only by two-thirds vote violates the Delaware General Corporation Law, the chancery court held. The DGCL is an enabling statute, but it only permits the bylaws to contain provisions "not inconsistent with law," and Section 141(k) allows holders of a majority of shares to remove directors (Frechter v. Zier, January 24, 2017, Glasscock, S.).

Prior to January 7, 2016, Nutrisystem’s bylaws allowed stockholders to remove directors only for cause and upon a vote of two-thirds of outstanding shares. In a bench decision in late 2015, the chancery court held that a bylaw allowing directors to be removed only for cause violated Section 141(k), which allows shareholders to remove directors with or without cause. The Nutrisystem board approved an amendment to its bylaw that struck the for-cause requirement, but kept a supermajority vote in place.

A Nutrisystem shareholder sued for a declaratory judgment that the removal provision violated the statute. Defending the plaintiff’s summary judgment motion, the defendants argued that Section 141(k) "sets the rules only for the circumstances under which stockholders may remove directors without cause, and does not address the percentage of the vote that is required to remove directors." This argument was "not easily comprehensible" to the court, which construed it as a contention that Section 141(k) is merely permissive: it provides only that a majority of stockholders may remove directors, but leaves the bylaws free to set a different requirement.

That is an unnatural reading of the statutory provision, the court wrote. Section 141(k) is permissive in the sense that it allows, but does not require, stockholders to remove directors. Under the bylaw, however, a simple majority of stockholders may not exercise the Section 141(k) power, rendering the provision unambiguously inconsistent with the statute. The court also referred to the 2015 bench decision invalidating bylaws that allow removal only for cause. Just as the language of Section 141(k) permits removal without cause, so does it mandate that a majority of stockholders may remove directors.

The case is No. 12038-VCG.

Attorneys: Jessica Zeldin (Rosenthal, Monhait & Goddess, P.A.) for Harold Frechter. M. Duncan Grant (Pepper Hamilton LLP) for Dawn M. Zier.

Companies: Nutrisystem, Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers DelawareNews

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