Delaware Business Litigation Report

Chancery Upholds Removal of Board Members

Barbey v. Cerego, Inc., C.A. No. 2022-0107-PAF (Del. Ch. Sept. 29, 2023)
This decision considered the proper constitution of the board of directors of a Delaware corporation, Cerego, Inc., under Section 225 of the DGCL after directors were removed following a corporate inversion whereby Cerego became a subsidiary of its wholly owned subsidiary, Cerego Japan, Inc. (“CJ”), a Japanese entity.

CJ initiated the inversion by offering to swap shares of CJ in exchange for the outstanding shares of Cerego through a tender offer. This inversion gave CJ a supermajority of Cerego’s outstanding shares, and once accomplished, CJ removed the existing board, including plaintiff, Kellogg Barbey, and replaced them with a new sole director.

Barbey challenged the removal arguing that the inversion was invalid because Cerego failed to give adequate notice of the special meeting at which Cerego authorized CJ to commence the tender offer, and as such, the actions taken at the meeting at issue were void. After analyzing Cerego’s bylaws, the Court determined that only a special meeting required notice. The Court found that the at-issue meeting was a special meeting of the Cerego board, requiring adequate notice. Because adequate notice was lacking, the actions taken at the special meeting were void.

However, despite this finding, the Court ultimately upheld the removal. As the Court explained, the plaintiffs did not satisfy their burden to invalidate Barbey’s removal as a director because they did not demonstrate that Cerego board action was required to authorize CJ’s tender offer that resulted in its becoming Cerego’s majority stockholder. Given this failure of proof, the removal was effective.

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