In CCSB Financial Corp. v. Totta, 2023 WL 4628822 (Del. Jul. 19, 2023), the Delaware Supreme Court affirmed the Court of Chancery’s post-trial decision that a so-called “Conclusive and Binding Provision” in a certificate of incorporation—providing that any “good faith” board decisions applying a stockholder voting limitation shall be “conclusive and binding upon the Corporation and its stockholders”—could not prevent judicial review for directors’ compliance with the fiduciary duty of loyalty. Having so found, the Court of Chancery ruled that the incumbent directors misapplied the voting limitation, and that they wrongfully refused to count votes that would have resulted in the election of insurgent directors.
In affirming the decision, the Supreme Court explained: “[w]hen the Court of Chancery reviews a claim in this context, the court, as it did here, performs a two-step review – first, it tests the legality of the board’s action under the charter, and second, it applies enhanced judicial review under established standards. CCSB argues in essence that the Conclusive and Binding Provision eliminates the first step, and requires business judgment review for the second step.” Such a provision was inconsistent with Section 102(b)(7) of the Delaware General Corporation Law (DGCL), which the Court reasoned “specifically prohibits a charter provision that directly or indirectly limits director liability for breaches of the duty of loyalty.” The Supreme Court reasoned that such a provision could be included in a Delaware limited liability company agreement or a Delaware limited partnership agreement, but it could not be included in a Delaware certificate of incorporation. Thus, the incumbent directors’ attempt to use it “to exculpate themselves from a breach of the duty of loyalty” was “prohibited by Delaware statute and public policy.” The Supreme Court accordingly affirmed the Court of Chancery’s decision that the insurgent slate prevailed in the election. It also affirmed that the insurgents’ efforts in obtaining a judicial construction of the provision comprised a corporate benefit entitling them to reimbursement of their attorneys’ fees and expenses.