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Tuesday
Dec242013

A Management Friendly Philosophy Applied to Management Disputes: Klaassen v. Allegro Development (Part 1)

Delaware courts issue management friendly decisions.  For the most part, this means decisions that favor management over the interests of shareholders.  Or, as VC Laster recently noted, Delaware has a "director-centric system of corporate governance."  Klaassen v. Allegro Development Corp., CA No. 8626-VCL (Del. Ch. Nov. 7, 2013).  

Increasingly, however, governance cases involve disputes among directors.  What does a management friendly approach mean in that context?  Most likely, it means an approach that favors management  directors (i.e., the CEO) over non-management directors, particularly independent directors.  Whatever the failings of independent directors, they are designed to reduce the influence of management in the governance process.  A judicial approach designed to limit their influence would be very management friendly.    

This hypothesis provides an interesting template for a review of Klaassen v. Allegro Development.  The case essentially involved a dispute between a CEO and the non-management directors.  At the time of the removal, the board consisted of two directors appointed by the holders of the Series A Preferred shares, the CEO (who also owned 70% of the common shares), and two outside directors designated by the CEO but approved by the holders of the Series A Preferred shares.  As a result, the board consisted of one management director and four non-management directors.

At a meeting held on Nov. 1, 2012, the board voted to remove the CEO.  Klaassen eventually filed suit challenging the dismissal.  Among other things, he asserted that he was entitled under equity to notice in advance of the meeting of the plans of the non-management directors to remove him.  As the court characterized: The CEO "contends that a board cannot take action adverse to the interests of such an individual unless the board provides him with advance notice and an opportunity to pre-empt the board by changing its composition. An individual with this combination of capacities and rights becomes a super director whose authority trumps Section 141(a) of the DGCL." 

The CEO asserted that the failure to provide notice rendered the actions of the board void.  The board in turn asserted that the actions were at most voidable and subject to equitable defenses.  They argued for, and the Chancery Court found applicable, the equitable doctrines of laches and acquiescence.  

The case is now on appeal.  In the next post, we will examine the case through the prisim of a management friendly outcome and use it to predict the decision of the Delaware Supreme Court.   

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