Sinchareonkul v. Fahnemann
Slip Opinion (2015)
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Rule of Law:
A corporate bylaw granting directors differential voting power is void if such power is not also set forth in the certificate of incorporation, as mandated by Section 141(d) of the Delaware General Corporation Law (DGCL).
Facts:
- In 1998, Semperit, Sri Trang, and Siam Sempermed entered into a Joint Venture Agreement (JVA) to form Sempermed USA, Inc. ("SUSA"), a Delaware corporation, for manufacturing and distributing latex surgical gloves in the U.S.
- The JVA contemplated an eight-member SUSA board, with four directors nominated by Semperit and four by Sri Trang, and stipulated that the chairman, elected from Semperit nominees, would have a tie-breaking 'Casting Vote' on most issues.
- SUSA's certificate of incorporation (the "Charter") fixed the number of directors at eight, with four elected by Sri Trang's stock and four by Semperit's stock, but did not provide for the chairman's designation or the Casting Vote.
- SUSA's bylaws, specifically Article III, § 11, contained a 'Chairman Election Bylaw' stating the chairman would be elected from Semperit directors, and a 'Casting Vote Bylaw' granting the chairman a tie-breaking vote in case of a board deadlock.
- In October 2014, SUSA's board voted on retaining a firm to value a trademark royalty payment; Semperit Directors voted in favor, Sri Trang Directors purported to vote by proxy against, and Chairman Thomas Fahnemann exercised the Casting Vote in favor.
- On January 13, 2015, the board voted on a 'Royalty Resolution' to amend the royalty payment to 1.75% of SUSA's net sales; Semperit Directors voted in favor, Sri Trang Directors voted against, and Chairman Fahnemann again exercised the Casting Vote in favor.
- Plaintiff Veerasith Sinchareonkul, a Sri Trang Director, filed suit against the Semperit Directors, challenging the validity of the Casting Vote Bylaw, the Chairman Election Bylaw, and the Royalty Resolution.
- After the lawsuit was filed, the Semperit Directors noticed a board meeting for February 10, 2015, to consider a 'Proposed Amendment' to the Charter to incorporate the provisions regarding the chairman's designation and the Casting Vote, with a subsequent stockholder meeting on February 27, 2015, to vote on it.
Procedural Posture:
- On January 14, 2015, plaintiff Veerasith Sinchareonkul filed a complaint in the Court of Chancery of the State of Delaware against defendants Thomas Fahnemann, Richard Ehrenfeldner, Gerhard Klingenbrunner, and Clemens Eichler (the Semperit Directors).
- The complaint sought three declaratory judgments: (1) that the Casting Vote Bylaw is void, (2) that the Chairman Election Bylaw is void and Fahnemann does not hold the office of chairman, and (3) that the Royalty Resolution is void.
- Plaintiff Sinchareonkul subsequently moved the court to schedule an expedited hearing on an application for a preliminary injunction to bar the defendants from exercising the Casting Vote or implementing the Royalty Resolution pending a final decision on the merits.
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Issue:
Does a Delaware corporation's bylaw provision that grants differential voting power to certain directors, including a tie-breaking vote for the chairman, violate Delaware law if those differential voting powers are not also specified in the certificate of incorporation?
Opinions:
Majority - Laster, Vice Chancellor
Yes, a Delaware corporation's bylaw provision that grants differential voting power to certain directors, including a tie-breaking vote for the chairman, violates Delaware law if those differential voting powers are not also specified in the certificate of incorporation. Vice Chancellor Laster explained that Delaware law follows a hierarchy of corporate documents: the DGCL, then the certificate of incorporation, and then the bylaws. A bylaw must not be inconsistent with either the DGCL or the certificate of incorporation. While Section 109(b) of the DGCL broadly permits bylaws relating to directors' rights and powers, it explicitly requires them to be consistent with law and the charter. Section 141(d) of the DGCL specifically addresses differential voting powers for directors, stating that such powers 'shall be stated in the certificate of incorporation.' This specific reference to the certificate of incorporation acts as a 'bylaw excluder,' meaning that these particular rights cannot be established solely in the bylaws. Citing Carmody v. Toll Bros. and Jones Apparel Gp., Inc. v. Maxwell Shoe Co., the court emphasized that such distinctive voting rights must be set forth in the charter. Consequently, the court found that the plaintiff had articulated a colorable claim that the Casting Vote Bylaw and the Chairman Election Bylaw are void, and that the Royalty Resolution adopted through the exercise of the Casting Vote is therefore also void.
Analysis:
This case significantly clarifies and reinforces the strict hierarchy of corporate governance documents in Delaware, especially concerning fundamental issues of director voting power. It underscores that explicit statutory mandates, such as DGCL Section 141(d)'s requirement for differential director voting rights to be in the certificate of incorporation, override provisions made solely in bylaws. This ruling acts as a strong reminder for corporate drafters and practitioners that even if a governance scheme is agreed upon in a joint venture or shareholder agreement, its implementation must strictly adhere to the DGCL's formal requirements regarding the placement of such provisions within the corporate charter. The decision will likely be cited in future challenges to bylaws that attempt to confer extraordinary or differential powers on directors without proper charter authorization, solidifying the precedence of the certificate of incorporation for critical governance mechanisms.
