In In re Vaalco Energy Shareholder Litigation., a bench ruling, the Court of Chancery invalidated provisions found in the certificate of incorporation and bylaws of a Delaware corporation that permitted directors to be removed only “for cause”. Generally, the Delaware General Corporation Law (“DGCL”) allows directors to be removed “with or without cause”. However, if the board of directors is classified or shareholders are given cumulative voting rights in director elections, the directors’ removal may be conditioned upon “cause”. In this case, neither exception was present. Relying on the plain language of the DGCL, the Court invalidated the “for cause” only provisions, despite the defendant corporation’s argument that many other companies utilized similar provisions.
Bottom Line: Unless a Delaware corporation has a classified board or provides shareholders with cumulative voting rights, it may not contractually require that directors be removed only “for cause”. Companies should review their organizational documents and modify them accordingly.