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June 17, 2022

Delaware Chancery Court Rejects Corporate Charter Provision Purporting To Alter Judicial Review Standard

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Key Takeaways

  • Unlike broad authority to modify fiduciary standards granted to alternative entities (such as LLCs), corporations have “limited” power that does not include authority to modify the judicial review standard.

Delaware's Chancery Court recently invalidated a charter provision that purported to make certain Board decisions "conclusive and binding," finding the Delaware General Corporation Law (DGCL) does not permit corporations to limit the scope of judicial review of fiduciary conduct. 

In Totta v. CCSB Fin. Corp., (Del. Ch. May 31, 2022), a longtime stockholder launched a proxy challenge to an incumbent Board. The Board invoked a charter provision prohibiting stockholders from voting more than 10 percent of the corporation's stock, and instructed the inspector of elections not to count votes above the limit. The insurgent challenged the count, arguing that application of the provision deprived it of victory.

The charter provision purported to make any good faith "constructions, applications, or determinations" by the Board regarding the vote-limit provision "conclusive and binding on the Corporation and its stockholders." The incumbent Board argued the provision required the court to review the challenged conduct under deferential business judgment standard - as opposed to a more exacting standard applicable where fiduciaries take actions affecting election contests.

Chancellor Kathaleen St. J. McCormick disagreed, holding corporation governance agreements "can only eliminate or modify fiduciary duties and the attendant judicial standards of review to the extent expressly permitted" by the DGCL. Unlike broad authority to modify fiduciary standards granted to alternative entities (such as LLCs), corporations have "limited" power that does not include authority to modify the judicial review standard. 

Totta illustrates the impact an entity's legal form may have in fiduciary litigation and underscores the need to examine the corporate form carefully to ensure the principles in their governing agreements are effective. Ballard Spahr's attorneys can assist in selecting the optimal form for your business entity, in crafting and reviewing structure and governance agreements.

Our Securities Enforcement and Corporate Governance Litigation Practice advises companies, their officers, and directors, on every type of securities and corporate governance claim-from derivative actions and regulatory or internal investigations to special committee representations and significant shareholder class actions. Our attorneys have the experience to identify and avoid potential obstacles in a case, a demonstrated ability to innovate, and a track record of success in the courtroom and through alternative dispute resolution.

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