Early stage companies are typically urged, and appropriately so, to ensure that their “charter documents,” specifically their certificate of incorporation and bylaws, are consistent with statutory requirements in their jurisdiction of organization, and reflect the short term and identifiable long-term objectives of the founding shareholders. Many founders will search for “boilerplate” documents on the internet or other public sources, and as their enterprises grow, seek to modify those forms to cover such items as super-majority voting provisions, director removal provisions, etc. Issues may arise, however, where those modifications are not consistent with statutory requirements.
For example, the Delaware Court of Chancery recently held in Frechter v. Zier, C.A. No. 12038-VCG, that a bylaw provision requiring supermajority stockholder approval for the removal of a director was inconsistent with Section 141(k) of Delaware’s General Corporation Law. Section 141(k) provides that (other than in cases of staggered boards or cumulative voting) a director may be removed with or without cause by a majority of the voting stockholders. While some provisions of the DGCL are based on a default rule that applies “unless otherwise provided in the certificate of incorporation or bylaws” the Court of Chancery held the majority standard set forth in Section 141(k) could not be modified by a bylaw provision.
The lesson taught by this decision is that it should not be assumed that statutory requirements may always be modified by inclusion of a contrary provision in a corporation’s certificate of incorporation or bylaws. The starting point should always be a clear understanding of the statutory requirement. The next step in the analysis is whether the statutory requirement is subject to modification within a corporation’s charter documents, and, if so, where that modification must be set forth in order to be enforceable. In making this analysis, the different processes for how a corporation’s certificate of incorporation may be amended as compared to an amendment to a corporation’s bylaws must be considered. In this regard, it should be noted that Section 102(b)(4) of the DGCL allows a corporation to include a provision in its certificate of incorporation that requires a supermajority vote for any corporate action.
Early stage companies, when drafting and amending their charter documents and considering such issues as general voting provisions, director removal, approval of corporate actions such as mergers, asset sales and dissolutions, should give appropriate thought to how the applicable statutory provisions require those issues to be addressed. Doing so will avoid statutory challenges to the validity of those actions in the future.