Delaware Business Litigation Report

Chancery Excuses Condition in Stockholder Agreement When Company Caused its Non-Occurrence

Chordia v. Lee, C.A. No. 2023-0382-NAC (Del. Ch. Jan. 4, 2024)
In this case, as part of a sale of a majority interest, a stockholder agreement granted the founders the ability to designate members to the board of directors so long as at least one founder remained at the company as an officer or employee. The agreement also granted the board the ability to hire and fire executive employees, but did not allow the board to terminate non-executive employees. In addition, the stockholder’s agreement required that the company use reasonable efforts to ensure the rights in the agreement remained effective for the founders’ benefit.

Following the sale, the board attempted to remove the remaining founders from the company in order to undermine the founders’ designation rights. Some of the founders were non-executive employees that the board was unable to remove, however. Therefore, the board appointed a new CEO to terminate these employees. In response, the plaintiffs filed suit under 8 Del. C. § 225. In its post-trial opinion, the Court held that the CEO acted for the company in carrying out the terminations and, therefore, was bound by the reasonable efforts provision. Therefore, because the company caused the non-occurrence of the requirement under the agreement, the founders retained their entitlement to appoint members to the board.

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