United States: Do We Have A Quorum?

Although its final episode aired more than a decade ago, there is still debate about the ending of HBO's critically-acclaimed series, the Sopranos. In fact, as one critic notes, "the only objectively true statement that can be made about that ending is that it's ambiguous."¹ This ambiguity was embraced and lauded by some fans, while others felt cheated by not knowing, with certainty, the fate of one of television's most well-known anti-heroes. 

While ambiguity is often revered in our entertainment, it is certainly less welcome in legal writing, which is why it's comforting to read a Delaware opinion (for what else would us lawyers do in our spare time!) grounded in black letter law - or as Vice Chancellor Laster puts it, "'universal constructions[.]'"² And, although the opinion in Applied Energetics isn't going to set off an armada of law review articles, it does set forth a clear reading of Section 141 of the DGCL, which addresses the procedural requirements for a board's authority to act validly - a matter of great importance (at least to us lawyers). In a nutshell, under Section 141(f) of the DGCL, a board may act by unanimous written consent, as long as there is a proper quorum. In Applied Energetics, the sole remaining director of a board with three directorships acted by unanimous written consent - to, among other matters, pay himself a salary - but, as the sole remaining director, he lacked the requisite authority to act because he was unable to satisfy the quorum requirements under the company's bylaws. The company's bylaws set the size of the board at three and provided that a majority of the board would constitute a quorum, rendering it impossible (without an amendment to the bylaws) for the board to properly take any action unless at least two of the three directorships were filled. 

Because process matters at the board level, here are some good refreshers from the case:

1. A board can act only if there is a quorum, and a quorum is determined by reference to directorships (i.e., the size of the board set forth in the bylaws or by resolution of the board), and not by directors actually in office.
2. In general, at a meeting at which a quorum is present, a majority of the directors at the meeting are required to approve an action (the bylaws can provide for less than a majority, but not lower than a 1/3^rd of the total number of directors).
3. A board may act by unanimous written consent; however, this option is available only if there are enough directors serving on the board of directors to satisfy the quorum requirement.
4. If a board determines to decrease its size (which is not uncommon for distressed companies seeking to save money), as part of that process, the remaining and departing directors should take care to amend the bylaws to appropriately reset the quorum requirements before the departing directors resign so that the resulting vacancies do not preclude the board from acting going forward (the root of the problem for the last director standing in Applied Energetics).
5. If a board is in a situation where it does not have a sufficient number of directors to serve, the remaining directors are empowered to appoint directors to fill vacancies so that the board can meet the quorum requirements - short of that, the board cannot validly act, and any actions it attempts to take will be defective and ineffective absent later court intervention.

Footnotes

1.     Excerpt from The Sopranos Sessions by Matt Zoller Seitz and Alan Sepinwall published by Abrams Press; retrieved from https://www.vulture.com/article/the-sopranos-ending-explained.html. 

2.       Applied Energetics Inc. v. Farley, et al. (Del. Ch. Aug. 11, 2020), quoting Crown EMAK P'rs LLC v. Kurz, 992 A.2d 377, 400 (Del. 2010).