Summary
holding that an "attempt to remove . . . a director by written consent of the board is invalid"
Summary of this case from Klaassen v. Allegro Dev. Corp.Opinion
Civil Action No. 278-N.
April 6, 2004.
Srinivas M. Raju Elizabeth C. Tucker Richards, Layton Finger, P.A., Wilmington, DE.
Sean Bellew Cozen O'Connor Chase Manhattan Centre, Wilmington, DE.
Dear Counsel:
This letter constitutes my decision in connection with the plaintiffs' motion for partial summary judgment in an action filed pursuant to 8 Del. C. § 225. On February 25, 2004, Mary Ritz and Frank George, directors of Regenesis Biomedical, Inc. (the "Company"), executed a written consent purporting to remove Daniel Puchek as the Company's chief executive officer and director ("CEO"). The plaintiffs have moved for partial summary judgment on the issue of whether Puchek is the CEO and director of the Company.
The plaintiffs include Solstice Capital II Limited Partnership, Harry George, Robert Watkins, Daniel R. Puchek, Aztec Venture Network, LLC, Valley Ventures III, L.P., Desert Regenesis, LLC, Village Ventures Partners Fund, L.P., Village Venture Partners Fund A, L.P., and VVN, LLC.
For simplicity, I refer to Frank George as "George" and Harry George as "Harry George."
Mot. for Partial Summ. J., Ex. A, at Resp. to Interrog. No. 16 (admitting that defendants Mary Ritz and Frank George attempted to remove Puchek solely by written consent).
Section 141(f) of the Delaware Code provides that "[u]nless otherwise restricted by the certificate of incorporation or bylaws, any action required or permitted to be taken at any meeting of the board of directors . . . may be taken without a meeting if all members of the board . . . consent thereto in writing." It is undisputed that all the Company's board members did not consent to Puchek's termination in writing. As a matter of law, Puchek's purported termination as CEO and removal as a director is invalid.
8 Del. C. § 141(f) (emphasis added).
Am. Compl., Ex. 10. The defendants' argument that the plaintiffs' motion for partial summary judgment is premature because the defendants have not had a chance to conduct discovery is without merit. The only issue before the Court is whether the actions taken by written consent are valid. Ritz and George have admitted that they attempted to terminate Puchek as CEO and remove him as a director by written consent. Mot. for Partial Summ. J., Ex. A, at Resp. to Interrog. Nos. 9 16. Only two of the five directors executed the written consent. Am. Compl., Ex. 10. The written consent speaks for itself and its validity is an issue of law.
The defendants contend that two directors, Watkins and Harry George, have a disabling self-interest that prohibits them from voting on the issue of Puchek's termination. Because of this self-interest, the defendants insist that the written consent was valid since the two remaining non-interested directors, Ritz and George, voted unanimously to terminate Puchek as CEO.
The defendants assert, for example, that Watkins is interested because the employee search firm he owns was retained to find a CEO, namely Puchek. According to the defendants, Watkins is incapable of voting on the issue of Puchek's termination because his company would have to return the finder's fee it received if Puchek is terminated. The defendants also assert that Puchek, Watkins, and Harry George are engaged in a scheme to dilute Ritz's and George's interest in the Company and for that reason, Watkins and George are interested and cannot decide whether to terminate Puchek in an objective manner.
This argument is meritless. Section 141(f) is explicit; "action required or permitted to be taken at any meeting of the board of directors . . . may be taken without a meeting if all members of the board . . . consent thereto in writing." Action by written consent requires unanimity of the entire board, not just the unanimity of the disinterested directors. There is no exception to this rule, even if a director has an interest in the transaction at issue. This comports with the notion that directors should participate actively and engage in discussion before voting at meetings. The policy underlying board action by written consent is that "meetings should be required except where the decision is so clear that the vote is unanimous and in writing." Unless there is unanimous written consent, the only way to remove Puchek as the CEO is at a special meeting of the board.
8 Del. C. § 141(f) (emphasis added).
Id.; Tansey v. Trade Show News Network, 2001 WL 1526306, at *4 (Del.Ch. Nov. 27, 2001) ("The board purported to approve [the merger agreement] by unanimous written consent, but that consent was not signed by Emslie [a director]. Because only a unanimous board can act by written consent under 8 Del. C. § 141(f) and because the . . . board never met to consider the [merger], the [merger] was never validly approved."); see also R. FRANKLIN BALOTTI JESSE A. FINKELSTEIN, 1 THE DELAWARE LAW OF CORPORATIONS BUSINESS ORGANIZATIONS § 4.13, pp. 4-24 (3d. ed. 2003) ("In contrast to the provisions relating to meetings of the board and to the provisions of Section 228 allowing stockholder action to take place upon the consent of a majority of the stockholders, director action in lieu of a meeting permitted by Section 141(f) must not only be in writing but must also be unanimous.")
Even if interestedness is disputed in the present case, for purposes of summary judgment it is irrelevant because 141(f) requires unanimity of the entire board, not unanimity of disinterested directors.
R. FRANKLIN BALOTTI JESSE A. FINKELSTEIN, 1 THE DELAWARE LAW OF CORPORATIONS BUSINESS ORGANIZATIONS § 4.13, pp. 4-24 (3d. ed. 2003); see also ERNEST L. FOLK, III, THE DELAWARE CORPORATION LAW: A STUDY OF THE STATUTE WITH RECOMMENDED REVISIONS 61 (unpublished manuscript, submitted to The Delaware Corporation Law Revision Committee) (1964) ("It is occasionally suggested that non-unanimous written consents should be as effective as unanimous consents. Of this theory, a written consent by a majority of directors would be as effective as majority action taken at a duly called meeting. This could, however, raise serious questions as to whether the non-consenting directors had received notice, whereas unanimous written consentipso facto proves notice actually received. Besides raising more questions that it would solve permitting non-unanimous written consent would make serious inroads upon the concept of meetings as forums in which ideas are exchanged and (hopefully) a consensus reached.") (emphasis in original).
BALOTTI FINKELSTEIN, supra, n. 10, at 4-24.
I note that a Special Meeting of the Board of Directors has been called for April 9, 2004 at 3:00 p.m. (prevailing eastern time). This meeting is for the board to address Ritz's and George's Demand Letter and the status of this § 225 action. If the parties are unable to resolve their differences in a cost-effective and amicable manner, it will be necessary to press forward with this expensive, expedited proceeding.
The final issue is whether Puchek remains a Joint Director of the Company. Because Ritz's and George's action by written consent was invalid, as discussed above, Puchek is still a Joint Director. Equally important, Ritz and George, who admitted that they were acting as directors and not in their capacity as shareholders, lacked the authority to remove Puchek as a director. "A director is an officer chosen by the stockholders," and Ritz's and George's attempt to remove Puchek as a director by written consent of the board is invalid.
Bruch v. Nat'l Guar. Credit Corp., 116 A. 738, 741 (Del.Ch. 1922) ("[D]irectors of an industrial corporation . . . cannot be removed by his fellow members.") At great length, Ritz and George argue that as controlling shareholders they have the power to remove a director. This argument is irrelevant because the issue before the Court is whether Ritz and George, acting as directors, can remove Puchek as a director, not whether the controlling shareholders can remove Puchek as a director. Mot. for Partial Summ. J., Ex. A, at Resp. to Interrog. No. 9 (admitting shareholders did not vote to remove Puchek as director).
Id.
For these reasons, any actions taken to terminate Puchek as CEO or remove him as a director are invalid. The plaintiffs' motion for partial summary judgment is granted.
Finally, defendants shall have until Wednesday, April 7, 5:00 p.m. (eastern time), to provide to the plaintiffs all documents and interrogatory answers that are the subject of plaintiffs' pending motion to compel.
IT IS SO ORDERED.