Corporate legal battles are often decided on nuanced readings of dense statutes, but one recent ruling that could expose scores of U.S. companies to shareholder lawsuits turned partly on a much simpler defense: everybody is doing it.
That failed to sway a Delaware judge, who ruled last month that oil producer Vaalco Energy Inc. had violated the state’s widely used corporate law with a charter provision that barred the removal of directors without cause.
The ruling could have an impact well beyond tiny Vaalco to include such well-known names as Aeropostale Inc., Cigna Corp., Ethan Allen Interiors Inc., JetBlue Airways Corp. and Toll Brothers Inc.
Those are some of the nearly 200 companies with similar charter provisions that Vaalco cited during its defense against a shareholder class action in Delaware’s Court of Chancery.
“Just as ‘all the other kids are doing it’ wasn’t a good argument for your mother,” said Vice Chancellor Travis Laster at a hearing on Dec. 21, “the idea that 175 other companies might have wacky provisions isn’t a good argument for validating your provision.”
Vaalco’s investor relations coordinator, Al Petrie, did not immediately return a call for comment.
Vaalco’s legal problems began when a group of activist investors said they intended to replace four of Vaalco’s seven directors after the company’s stock began to tumble in late 2014.
Vaalco argued that its charter and bylaw provisions only allowed investors to remove members of its board for cause.
Several shareholders filed class actions in December alleging the charter was invalid under Delaware law, which allows for the removal of directors without cause.
Delaware law does make exceptions, including for companies with a classified board, or one in which members are elected for differing terms. Vaalco dropped the classified board structure in 2009, but never changed its charter or bylaws.
Laster seemed unsympathetic about the impact his ruling might have on the other companies.
“To the extent that this upsets expectations at some give-or-take 175 public companies is just a consequence of people not reading the statute,” he said, according to a transcript.
After Laster’s ruling, Vaalco agreed to changes to its board.
A client memo from Wachtell, Lipton, Rosen & Katz attorney William Savitt, who defends companies, said shareholder attorneys may demand a board comply with the Vaalco ruling and then seek a fee if a change is made.
Shareholder attorney Mark Lebovitch told Laster during a hearing that a quick review of the list of companies with allegedly invalid charter provisions showed many were out of business or were actually in compliance with Delaware law.
Jason Halper, a corporate attorney with Orrick, Herrington & Sutcliffe said he doubted the Vaalco ruling would inspire a flood of lawsuits against the companies with similar charters, partly because it was hard to see how shareholders were harmed.
“It’s not a live issue without a proxy fight,” he said.
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Andrew Hay)
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