DELAWARE SUPREME COURT RULES THAT NO NOTICE REQUIRED TO TERMINATE CEO AT REGULAR BOARD MEETING

On March 14, 2014, the Delaware Supreme Court, in a decision that corporate general counsel were watching closely, held that a Delaware corporation’s board of directors can terminate the corporation’s CEO at a regularly scheduled board meeting without providing the CEO with advanced notice. The plaintiff, Robert Klaasen, founded Allegro Development Corporation (“Allegro”) in 1984 and served as its CEO until 2012. When Allegro experienced continued financial underperformance, the board of directors began discussing a plan to remove Klaasen as CEO. Prior to Allegro’s regularly scheduled November 1, 2012 board meeting, Allegro’s four directors (excluding Klaasen) held two conference calls where they discussed a plan to replace Klaasen as CEO, and they engaged an outside law firm to draft a resolution to replace Klaasen at the November 1 board meeting. At that November 1 board meeting, the four directors, without prior notice to Klaasen, voted to remove Klaasen from his position as CEO. Approximately seven months later, Klaasen filed suit in the Delaware Court of Chancery asking for a declaration that he was the lawful CEO of Allegro because the termination was invalid as he was not provided with advance notice of the plan to remove him as Allegro’s CEO.

The Delaware Supreme Court affirmed the Court of Chancery’s decision that the removal was valid. The court held that, under Delaware law, directors are not required to be given notice of regularly scheduled board meetings, and thus there is nothing that requires notice of a specific item that will be addressed at the meeting. Nothing in Allegro’s bylaws altered that default rule. The court then distinguished two Court of Chancery opinions on the ground that in those actions the CEO’s removal occurred at special, rather than regular, board meetings. The court also rejected Klaasen’s argument that he was deprived of advanced notice of the two conference calls prior to the November 1 board meeting (i.e., special meetings), reasoning that the conduct that Klaasen complained of—his termination as CEO—occurred at the regularly scheduled meeting and not during the two prior conference calls. The court also rejected Klaasen’s separate argument that his termination was invalid because the directors employed deception in his removal, holding that Klaasen acquiesced in his removal when he helped transition the new CEO into the role and negotiated a consulting agreement with Allegro.

The Delaware Supreme Court’s holding means that any CEO of a Delaware corporation that desires advanced notice of a plan to remove him or her from their position will need to ensure that the corporation’s bylaws contain an advanced notice provision. The case is Klaasen v. Allegro Development Corp., No. 583, 2013, C.A. No. 8626 (Del. Mar. 14, 2014).