Chancery Court Says Bylaws, Stockholder Agreement Make Ineffective Bid To Oust TradingScreen CEO
The Delaware Chancery Court has held a stockholder consent that purported to remove the CEO of TradingScreen Inc. was ineffective under Delaware law as it was prohibited by the company's bylaws and a stockholders agreement. The ruling highlights the importance of reviewing and complying with a company's charter documents and any stockholder agreements when taking any corporate action.
Background and Decision
In October 2017, two stockholders - Philippe Buhannic, TradingScreen’s founder, and Patrick Buhannic - executed a consent that purported to remove Pierre Schroeder as both the CEO and chairman of the board of directors. The consent also sought to remove Piero Grandi as the company’s independent director. Schroeder and Grandi subsequently filed a lawsuit.
In a Jan. 10 decision, Vice Chancellor J. Travis Laster ruled in favor of the plaintiffs. With respect to Schroeder, the judge found the bylaws rendered his removal as CEO ineffective because the power to hire and fire officers rests solely with the board.
The Vice Chancellor also held the consent cannot effectively remove Schroeder because of the Stockholders Agreement. The agreement states, in part, the stockholders agree to elect and maintain “three representatives designated by the holders of a majority of the Common Stock, one of whom shall be the CEO.”
The plaintiffs argued this section constrains stockholders’ options by requiring that they fill one of their seats with the board-selected CEO, and prohibited the stockholders from removing the CEO from his director position. The defendants argued the stockholders are free to appoint whomever to the Board of Directors and this provision merely constrains the Board's ability to choose a CEO by limiting the pool of potential CEO candidates to the three directors appointed by a majority of the common stockholders.
The Vice Chancellor sided with the plaintiffs, saying it was the only reasonable interpretation when the section was read in context and against the backdrop of Delaware law. “[T]he Stockholders Agreement unambiguously mandates that the common stockholders appoint and maintain the Board-appointed CEO as a director. Removing Schroeder would violate that obligation.”
As for Grandi, the consent purported to replace him with another individual. But the Vice Chancellor said the Stockholders Agreement requires that approval of the holders of a majority of Series D Preferred Stock is required for any designee. The preferred stockholders have not given their approval, meaning the appointment was ineffective and Grandi will continue to serve.