Friday, December 27, 2013
Over at The Race to the Bottom Blog, Jay Brown has posted a 3-part series reviewing Klaassen v. Allegro Development, a case currently pending before the Delaware Supreme Court, which deals with the issue of how much notice a board is required to provide a CEO before firing him or her. What follows are brief excepts from each of the three parts, but you should definitely follow the links for the full discussion if this material is of interest to you.
Increasingly … governance cases involve disputes among directors. What does a management friendly approach mean in that context? Most likely, it means an approach that favors management directors (i.e., the CEO) over non-management directors, particularly independent directors…. This hypothesis provides an interesting template for a review of Klaassen v. Allegro Development. The case essentially involved a dispute between a CEO and the non-management directors…. At a meeting held on Nov. 1, 2012, the board voted to remove the CEO [Klaassen]. Klaassen eventually filed suit challenging the dismissal…. The board in turn asserted that the actions were at most voidable and subject to equitable defenses. They argued for, and the Chancery Court found applicable, the equitable doctrines of laches and acquiescence. The case is now on appeal.
In Klaassen, the Chancery Court conducted a tutorial on the developpment of notice requirements for directors…. Beginning in the 1990s … the courts, as VC Laster put it, "took a very different approach to advance notice for special board meetings." Unlike the 1980s, when shareholders could occasionally win a major governance case (recall Van Gorkom or Unocal), the 1990s began a period of decision making where this was less likely to occur…. In Klaassen, the Vice Chancellor described the [Fogel] decision as “dramatically expanding” the existing line of authority. The case essentially required advance notice to a CEO before termination. “If Fogel is correct, then a board with a Chairman/CEO cannot fire its CEO without first giving the CEO explicit advance notice and an opportunity to call a special meeting of stockholders at which the composition of the board might change, regardless of how few shares the Chairman/CEO owns.”
The management friendly nature of Delaware dictates that its Supreme Court will either reaffirm (or at least not overturn) the obligation of boards to notify the CEO in advance of an impending termination. The Court will affirm (or at least not overturn) the obligation to provide this notice irrespective of the percentage of shares owned by the CEO. In other words, the aftermath of the opinion will be that CEOs are entitled to advanced notice of their termination…. As a result, the instances of CEO removal will decline…. As to the actual decision in Klaassen, any prediction is a bit more problematic…. But, to go out on a limb, we predict that the Court will not just tamper with the reasoning but will actually reverse the Chancery Court opinion. The case was written by a Vice Chancellor [Laster] that has shown significant independence. Indeed, the decision in Klaassen was to uphold the dismissal of a CEO by a non-management board. Moreover, under the race to the bottom, management has incentive to find jurisdictions with favorable law…. Reversing a decision that permitted removal of the CEO without advance notice will be an outcome that management will see has highly favorable.