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Delaware Chancery Law Blog Corporate and Commercial Practice in the Delaware Court of Chancery

Disputes Over Board Composition or Officer Position

Posted in Shareholder Disputes

If you are a shareholder or director of a Delaware corporation, and you dispute the composition of the company’s board of directors, or the appointment of an officer, you have a remedy under the Delaware General Corporation Law (“DGCL”).  This post will generally discuss such disputes, and the scope of remedies available to such shareholders or directors.

What Mechanism Can a Shareholder or Director Use To Challenge the Propriety of the Composition of a Board of Directors or the Holding of Office by an Officer?

Section 225 under the DGCL provides the means whereby the Court of Chancery can adjudicate an action that challenges an election, appointment, removal or resignation of any director or officer. The purpose of such a suit is to address and resolve the uncertainty that arises when the authority of corporate leaders and, thus the governance of a corporation, is in dispute.

Is a Section 225 Action Limited to Disputes Over the Election of Directors and Officers?

No. In addition to disputes over the election of officers and directors, a Section 225 proceeding can be initiated to address the result of any vote of stockholders or members, such as a disputed stockholder vote over matters other than to the right of a director or officer or member of a governing body to hold office, as well as the right of any person to hold or continue to hold office.

Can Corporate Wrongdoing Be Addressed in a Section 225 Action?

Because of the need to expeditiously determine the outcome of a disputed election, a proceeding under Section 225 is strictly limited to those issues necessary to the determination of the statute’s purpose. Therefore, unless it is necessary to the determination of the proper composition of a board of directors or officers of the company, collateral issues such as breach of fiduciary duties or disputed share ownership will be deemed outside the purview of such an action.

Who Can Bring an Action Under Section 225?

• Shareholders (both record holders or beneficial holders)

• Directors (incumbent and putative)

• Officers (only if his or her own title to office is in dispute)

• Members of a corporation having no stock

How Quickly Can a Petitioner Expect To Get a Resolution After Filing a Section 225 Action?

Section 225 actions are summary in nature, and thus the Court of Chancery hears such a case on an expedited basis. These cases, depending on the issues raised in them, are heard within two to four months of filing the action.

Is There Any Protection Against Dissipation of Assets by the Incumbent Management While the Case Is Pending?

While a Section 225 case is pending, the parties usually enter into a status quo order that prevents the incumbent director, officer or member of a governing body from taking actions outside the ordinary course of business. Such orders are typically agreed to among the parties priorto appearing before the Court, but sometimes when the parties cannot agree, the Court on its own enters such an order.

Carl D. Neff is a lawyer with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.