Delaware Chancery Court Rejects Corporations Charter Provision Purporting to Alter Standard of Judicial Review | Ballard Spahr LLP

The Delaware Chancery Court recently struck down a charter provision that purported to make certain board decisions “conclusive and binding,” finding that Delaware’s General Corporate Law (DGCL) does not permit corporations to limit the scope of judicial review of fiduciary conduct.

In Tota c. CCSB Fin. Corp., (Del. Ch. May 31, 2022), a longtime shareholder has launched a proxy challenge to an incumbent board. The board invoked a charter provision prohibiting shareholders from voting more than 10 percent of the company’s stock and ordered the inspector of elections not to count votes above the limit. The insurgent challenged the count, arguing that the application of the provision deprived him of victory.

The charter provision was intended to make any good faith “construction, application or decision” by the board regarding the voting limit provision “conclusive and binding on the company and its shareholders.” Incumbent counsel argued that the provision requires the court to review the impugned conduct on a standard of deferential business judgment – ​​as opposed to a higher standard applicable when trustees take actions affecting electoral contests.

Chancellor Kathaleen St. J. McCormick disagreed, entering into corporate governance agreements “can only eliminate or alter fiduciary duties and the resulting standards of judicial review to the extent expressly permitted. ” by the DGCL. Unlike the broad power to change fiduciary standards granted to alternative entities (such as LLCs), corporations have a “limited” power that does not include the power to change the standard of judicial review.

Total illustrates the impact that the legal form of an entity can have in fiduciary disputes and highlights the need to carefully consider the form of the company to ensure that the principles of their governing agreements are effective.

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