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Frechter v. Zier

Court of Chancery of Delaware

January 24, 2017

HAROLD FRECHTER, Plaintiff,
v.
DAWN M. ZIER, MICHAEL J. HAGAN, PAUL GUYARDO, MICHAEL D. MANGAN, ANDREW M. WEISS, ROBERT F. BERNSTOCK, JAY HERRATTI, BRIAN P. TIERNEY, and NUTRISYSTEM, INC., Defendants.

          Submitted: November 11, 2016

          Jessica Zeldin, of ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; OF COUNSEL: Carl L. Stine, Fei-Lu Qian, of WOLF POPPER LLP, New York, New York, Attorneys for Plaintiff.

          M. Duncan Grant, Christopher B. Chuff, of PEPPER HAMILTON LLP, Wilmington, Delaware; OF COUNSEL: Jay A. Dubow, of PEPPER HAMILTON LLP, Philadelphia, Pennsylvania, Attorneys for Defendants.

          MEMORANDUM OPINION

          GLASSCOCK, Vice Chancellor

         This matter involves competing case-dispositive motions asking me to declare whether a corporate bylaw provision is consistent with the Delaware General Corporation Law ("DGCL"). The provision in question states that the stockholders of the company may remove directors, but only upon the vote of "not less than 66 and two-thirds percent . . . of the voting power of all outstanding shares" of company stock. This bylaw runs afoul of 8 Del. C. § 141(k), under which directors may be removed by a majority vote of corporate shares.[1] Accordingly, the Defendants' Motion to Dismiss is denied, and the Plaintiff's Motion for Summary Judgment on Count II of his complaint, seeking a declaratory judgment, is granted; by stipulation of the Plaintiff, Count I-alleging breach of fiduciary duty against the directors for enacting or maintaining an invalid bylaw-is withdrawn. My reasoning follows.

         I. BACKGROUND[2]

         The Plaintiff is a shareholder of Defendant Nutrisystem, Inc. ("Nutrisystem" or "the Company") and has owned his shares at all relevant times.[3] Nutrisystem is a Delaware corporation with its corporate headquarters in Fort Washington, Pennsylvania.[4] The Defendants consist of members of the Nutrisystem Board of Directors (the "Board") as well as Nutrisystem.[5] The Plaintiff purports to bring this class-action on behalf of all public stockholders of the Company.[6]

         The Company's charter gives the Board the authority to "make and to alter or amend the By-laws of the [Company]."[7] "On January 7, 2016, the Company filed a Form 8-K with the Securities and Exchange Commission announcing that the Board had approved an amendment to the Company's Bylaws."[8] Prior to the amendment, the relevant bylaw allowed Company stockholders to remove directors only for cause and upon the affirmative vote of two-thirds of all outstanding shares of Company stock (the "Removal Provision").[9] The amendment struck the "for cause" requirement from the Removal Provision-presumably in response to a recent holding of this Court interpreting such a provision as unlawful[10]-so that the Removal Provision now states:

Removal. Except as otherwise provided in the Certificate of Incorporation, no director may be removed from office by the stockholders of the Corporation except by the affirmative vote of the holders of not less than sixty-six and two-thirds percent (66 2/3%) of the voting power of all outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, considered for this purpose as a single class.[11]

         In other words, the Company currently has a bylaw requiring a super-majority vote of at least two-thirds of the voting power of all outstanding shares in order to remove directors.

         The Plaintiff filed his Verified Class Action Complaint on February 24, 2016 (the "Complaint") pleading two counts. In Count I, the Plaintiff alleges a breach of fiduciary duty against the Defendants.[12] The Plaintiff contends that the directors breached the duty of loyalty by enacting an unlawful bylaw to entrench themselves in office. In Count II, the Plaintiff seeks a declaratory judgment that the Removal Provision is in violation of 8 Del. C. § 141(k). The Defendants moved to dismiss the Complaint on May 27, 2016 and the Plaintiff moved for partial summary judgment on Count II on August 9, 2016. I heard argument on both motions on October 20, 2016. The Plaintiff represented at Oral Argument that, should I find in his favor on Count II, he would not pursue Count I.[13] My Memorandum Opinion addressing Count II follows.

         II. ANALYSIS

         Summary judgment is appropriate when the moving party shows that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."[14] The moving part must demonstrate the "absence of a material factual dispute"[15] and all facts and "reasonable hypotheses or inferences" drawn therefrom "must be viewed in the light most favorable to the non-moving party."[16] Plaintiff's Motion for Partial Summary Judgment turns purely on the interpretation of a section of the DGCL, therefore summary judgment is appropriate here. Summary judgment here will require the Plaintiff to overcome the presumption that the bylaws are valid, [17] and to demonstrate that the bylaw in question cannot operate validly "in any conceivable circumstance."[18]

         The DGCL is, broadly, an enabling statute. Section 109(b) of the DGCL states, in relevant part, that "[t]he bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders . . . ."[19] Section 141(k) of the DGCL, however, provides that "[a]ny director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors" subject to two exceptions not pertinent here.[20] The Plaintiff asserts, persuasively, that the bylaw in question is "inconsistent with law, " and thus not permitted under Section 109(b).

         As our Supreme Court has explained,

[t]he rules of statutory construction are well settled. They are designed to ascertain and give effect to the intent of the legislators, as expressed in the statute. At the outset, the court must determine whether the provision in question is ambiguous. A statute is ambiguous if it is reasonably susceptible of two interpretations. If it is unambiguous, no statutory construction is required, and the words in the statute are given their plain meaning.[21]

         Under the plain language of the statute, I find that the Removal Provision is inconsistent with Section 141(k). I address the ...


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