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CALIFORNIA CORPORATE & SECURITIES LAW

Is Section 141(d) Truly Oxymoronic?

Section 141(d) of the Delaware General Corporation Law provides that the directors of any corporation may “be divided into 1, 2, or 3 classes”.  It’s hard to make sense of this statement.  First, I don’t believe that Delaware legislature meant to provide that individual directors may be cut up into pieces.  A more accurate statement would be that the board of directors, and not the directors themselves may be parsed into classes.  A more troubling problem is the statute’s allowance of a class of one.  What exactly does it meant to “divide” (an obvious malapropism) a board into a single class?

Vice Chancellor J. Travis Laster recently had occasion to ponder this question in In re Vaalco Energy Shareholder Litigation (Dec.21, 2015) (Case. No. 11775-VCL).  The corporation in that case had declassified its board of directors but retained charter and bylaw provisions that allowed for the removal of directors only for cause.  Although Section 141 of the DGCL permits removal of a director or the entire board of directors with or without cause, there is an exception for corporations whose boards are classified pursuant to Section 141(d).  The defendants argued that this exception allowed them to retain removal only for cause.  Vice Chancellor Laster rejected this argument on the grounds that the defendants had not informed that stockholders that “We are declassifying, and we are declassifying from three classes into one class, and our newly re-classified one-class board will have all the attributes of a classified board under Delaware law and, therefore, will not allow removal except for cause.”

Although Vice Chancellor provides an explanation for Section 141(d)’s reference to a single class, he does describe the idea as “oxymoronic” twice in his ruling.  Indeed, the notion that one thing may be “divided” into a single thing boggles the imagination.

California’s statute avoids these problems.  Section 301.5 of the Corporations Code allows a listed corporation to “divide the board of directors” into two or three classes.

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