In the decision of Barbey v. Cerego, Inc., C.A. No. 2022-0107-PAF (Del. Ch., Sept. 29, 2023), the Delaware Court of Chancery considered the proper constitution of a Delaware corporation's board of directors under Section 225 of the Delaware General Corporation Law ("DGCL") after members of the board of directors were removed following a corporate inversion. The Court determined that the plaintiff did not meet its burden of proof to challenge the removal of board members, and therefore the removal of the entire board, and their replacement by a new sole director, was effective.
Background
Carego Japan, Inc., a Japanese company and wholly owned subsidiary of Carego, Inc., a Delaware corporation, initiated a corporate inversion when it offered to swap shares of Carego Japan in exchange for the outstanding shares of Carego through a tender offer. The inversion would give Carego Japan a supermajority of Carego's outstanding shares. Once that was accomplished, Carego Japan took action to remove the existing board of directors of Carego, including Plaintiff Barbey.
Barbey challenged the removal based on the argument that the inversion was invalid. Specifically, he argued that Carego did not give adequate notice of the special meeting of the board at which Carego authorized Carego Japan to commence the tender offer.
Section 225 of the DGCL permits any stockholder or director to apply to the Delaware Court of Chancery to determine the validity of any election, appointment, removal or resignation of any director or officer of any corporation. 8 Del. C. § 225. These are "in rem proceedings" which only exert jurisdiction over the corporation and may only provide relief concerning the corporate office. Slip op. at 15. Other types of ultimate relief beyond what is necessary to determine the proper holder of a corporate office may only be obtained through a plenary action through which the court would exercise jurisdiction over affected parties. Id.
To resolve the issues presented, the Court had to determine whether the board meeting at issue was a regular meeting of the board or a special meeting of the board. Only a special meeting required notice. The Court analyzed Carego's bylaws to determine whether the meeting held was properly described as a regular meeting or a special meeting, as well as the notice requirements under the bylaws.
The key findings of the Court for purposes of this Section 225 action were: (i) although a regular meeting did not require notice under the bylaws, a special meeting did require notice which was not properly given under Carego's bylaws, thereby making the actions taken at the special meeting void.
Nonetheless, the Court found that, even though Barbey did not anticipate or address the issue of whether the inversion and tender offer even required approval by Carego's board, board action was not required to authorize Carego Japan's tender offer that resulted in it becoming the majority stockholder of Carego. Therefore, the actions taken by the new majority stockholder to remove the board and appoint a new sole director were effective.
In sum, the Court explained that the plaintiff merely focused its case on whether or not there was proper notice for a special board meeting and whether the actions taken at the meeting were void, but even though the Court found that meeting to be void, the Vice Chancellor also held that the corporate inversion making Carego Japan the majority stockholder properly authorized it to remove all of the board members.
Takeaway
The Barbey decision demonstrates that while Delaware courts emphasize the fundamental principle that a special meeting held without due notice to all directors is not lawful, a plaintiff nonetheless has the burden of proof to show that a subsidiary lacked authority to commence a tender offer that results in it becoming the parent company's majority stockholder.
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