Director Vacancies Can Be Filled Using Stockholder Vote

The Delaware General Corporation Law, like the business corporation law of most states, provides in Section 223(a) that vacancies on a corporate board can be filled through appointment of new directors by the existing directors unless the certificate of incorporation or bylaws provide otherwise. However, unlike the corporation law in other states, Section 223(c) of the DGCL allows stockholders in certain circumstances to petition the Court of Chancery to direct that a special stockholders’ meeting take place in order to fill the vacancies through a stockholder vote. Section 223(c) commits the decision to grant the petition to the discretion of the court. In Canmore Consultants v. L.O.M. Medical International, C.A. No. 8645-VCG (Del. Ch. Sept. 19, 2013), the Court of Chancery, in a case of first impression, addressed the question of who bears the burden of persuading the court to order a special meeting for the purpose of filling director vacancies and how the court should exercise its discretion in deciding whether to require a stockholder vote. After reviewing the history and purpose of Section 223, the court held that the burden of persuasion is on the petitioning stockholders, who must show that a stockholder vote is necessary to avoid some specific, identifiable inequity that would result from the existing directors filling the vacancies.

The court reviewed the background of Section 223. The court noted that, historically, newly elected directorships and director vacancies were filled only through means of a stockholder vote. The DGCL modified the law to allow the existing directors to appoint new directors to fill any vacancies that arose between annual meetings, thereby saving the company the expense and distraction of convening a special meeting for purposes of conducting a stockholder vote to fill the vacancies. That authority is now codified in Section 223(a) of the DGCL. However, Section 223(c) of the DGCL limits the authority of the existing directors to fill vacancies in certain circumstances. Section 223(c) provides that if, at the time of filling any vacancy or newly created directorship, the directors then in office constitute less than a majority of the board, then the holders of at least 10 percent of the outstanding voting stock of the company can petition the Court of Chancery to order an election to be held to fill the vacancies or to replace the new directors appointed by the existing directors. The statute commits the decision to grant the petition to the discretion of the court, but is silent as to how that discretion is to be exercised.