Fogel v. U.S. Energy Systems Inc: "Improperly Convened" Meetings And The Blasius Standard In Delaware

In Fogel v. U.S. Energy Systems Inc., No. 3271-CC, 2008 WL 151857 (Del. Ch. Dec. 13, 2007 ) the Delaware Chancery Court decided that a confrontation between the CEO and directors was not a “meeting” under section 141 of Delaware’s General Corporation Law.

A board meeting was scheduled for the morning of June 29. Before the meeting, the three independent directors agreed to fire the CEO, the only other director on the board. They arrived at the designated time and place and one of the directors announced the decision to the CEO. Thereafter, the CEO attempted to call a special meeting for the purpose of voting on the removal of the other directors and election of replacements. In the subsequent litigation, the court had to determine whether the CEO had been properly dismissed, thereby depriving him of the authority to call the special meeting.

Ignoring the fact that the meeting had been noticed and that all of the directors were present, the court concluded that no meeting had occurred, rendering the dismissal ineffective.

• Although the Corporation Law does not prescribe in detail formal requirements for board meetings, the meetings do have to take place. The evidence presented at trial leaves many doubts about whether the confrontation between the independent directors and [the CEO] on the morning of June 29 constitutes a meeting. The mere fact that directors are gathered together does not a meeting make. There was no formal call to the meeting, and there was no vote whatsoever. The independent directors caucused on their own in what they admit was not a meeting and informally decided among themselves how they would proceed. Simply "polling board members does not constitute a valid meeting or effective corporate action." [footnotes omitted]

Moreover, even had a meeting occurred, the actions were invalid. Effectively the court took the position that the independent directors had a duty to notify the CEO of their intent to dismiss him and that the failure amounted to deception.

• Even if the independent directors' confrontation with Mr. Fogel could properly be characterized as a meeting, the meeting was not properly noticed and is therefore void. Before a corporation may hold a special meeting of its board of directors, each director must receive notice as prescribed by the bylaws; to the extent such a meeting is held without notice, the meeting and "all acts done at such a meeting are void." Although there is no "hard and fast legal rule that directors be given advance notice of all matters to be considered at a meeting," there must be notice sufficient to allow directors "an adequate opportunity to protect [their] interests." Where a director is tricked or deceived about the true purpose of a board meeting, and where that director subsequently does not participate in that meeting, any action purportedly taken there is invalid and void.

As a result, the CEO was not properly dismissed and was authorized to call for a special shareholder meeting. The board were ordered to hold the meeting.

The court also resolved whether the directors breached their fiduciary duties by ignoring Fogel’s call for a special meeting, thereby interfering with the stockholder’s ability to vote. Delaware law holds that where directors act with the primary purpose of thwarting a shareholder vote, they violate their duty of loyalty, even if such actions are taken in good faith (Blasius Industries v. Atlas Corp., 564 A.2d 651, 663 (Del. Ch. 1988). Here, the court determined that although the decision by the board unquestionably interfered with the shareholder's ability to cast votes when it ignored the CEO's call, the decision was not made with the “principle purpose of preventing the shareholders from electing a majority of new directors.” Rather, the board ignored the CEO's call for such a meeting because it believed in good faith that Mr. Fogel had been fired and lacked the authority to call for such a meeting. As such, the directors did not breach their fiduciary obligations of loyalty, the court concluded.

The primary materials for this case can be found on the DU Corporate Governance website.

Comments

[Harry Gerla]

I find this case both a bit ironic and a bit instructive. I agree that the case does show a degree of pro management bias in so far as it undermined independent directors. On the other hand, the Chancery Court did actually take some actions along the lines suggested by those interested in making Delaware corporate law more friendly to shareholders. First, it prevented the directors from blocking a shareholder vote on the removal of directors. Getting shareholders more involved in the selection of directors has long been a theme sounded by many of the contributors to this blog. Moreover, the ability to remove directors is certainly one of the few important powers held by shareholders. Second, the court faulted the impromptu directors "meeting" for, among other things, not giving the CEO/director sufficient notice of the matters to be considered at the meeting so as to be able to protect his interests. I recall that one of the defects in the initial board meeting in the Trans Union case is that Van Gorkum did not inform his fellow directors what was to be discussed in the meeting (the deal to sell Trans Union to the Pritzgers). Perhaps some silver linings in an otherwise dark cloud.

[J. Robert Brown]

But isn't coincidental that the court allowed the vote to go forward in circumstances that involved the CEO trying to remove the "independent" directors? In other words, its not about shareholder rights but about CEO rights. And isn't it coincidental that where, under the terms of the statute, notices for board meetings do not have to include the purpose, the court would find a common law obligation to include the purpose in circumstances that involved the removal of the CEO? For all intents and purposes, it is imposing on independent directors an obligation to notify CEOs before they take action against them.

If this case portends greater shareholder involvement in the governance process or greater notice requirements at the board level in general, I'd agree with your comment. But it won't. It's about management not shareholders.