Jay Fretcher v. Cryo-Cell International, Inc., C.A. No. 11915-VCG (Del. Ch. Oct. 07, 2016)

The plaintiff-stockholder sued the defendant-corporation seeking a declaration that a provision in a corporation’s bylaws was illegal.  The provision at issue provided that directors could be removed by shareholders “for cause.”  However, pursuant to Section 141(k) of the Delaware General Corporation law, stockholders may remove directors “with or without cause.” After the plaintiff filed for summary judgment, the defendant-corporation amended its bylaws to remove the relevant language, which mooted the action.  In addressing the proper fee award in the mootness proceeding, the Court recognized that the bylaw provision at issue was not explicitly illegal, but was misleading to stockholders and could have a chilling effect on the exercise of their franchise under Section 141.

BOTTOM LINE: Shareholders have an absolute right to remove directors with or without cause.  A bylaw provision that speaks only to removal of directors “with cause,” without mentioning the removal of directors “without cause,” is misleading and potentially illegal.  A bylaw setting forth the process a shareholder may use to remove directors must be drafted to make clear that “cause” is not a requisite for such removal.