Is a corporate bylaw that conflicts with the Delaware General Corporation Law valid?

Crown Bylaw Amendments Are Invalid

The Court of Chancery held that the Crown Consents are ineffective because they purported to amend the Bylaws in a manner that conflicts with the DGCL. Section 109(b) of the DGCL provides that the bylaws of a Delaware corporation "may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees."⁴⁸ Therefore, a bylaw provision that conflicts with the DGCL is void.

§ 109. Bylaws.

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(b) The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees. The bylaws may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

When evaluating corporate action for legal compliance, a court examines whether the action contravenes the entity-specific corporate contract. The components of that contract form a hierarchy, comprising from top to bottom (i) the Delaware General Corporation Law (the "DGCL"), (ii) the certificate of incorporation, and (iii) the bylaws.⁷ Each of the lower components of the contractual hierarchy must conform to the higher components. A bylaw that conflicts with the charter is void, as is a bylaw or charter provision that conflicts with the DGCL.

When analyzing the validity of a bylaw, the starting point is Section 109(b) of the DGCL, which specifies what bylaws can address. It states:

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The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

The first certified question asks whether the board of a Delaware non-stock corporation ¹⁰ may lawfully adopt a bylaw that shifts all litigation expenses to a plaintiff in intra-corporate litigation who “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought.” ¹¹ Under Delaware law, a corporation's bylaws are “presumed to be valid, and the courts will construe the bylaws in a manner consistent with the law rather than strike down the bylaws.” ¹² To be facially valid, a bylaw must be authorized by the Delaware General Corporation Law (DGCL),¹³ consistent with the corporation's

[91 A.3d 558]

certificate of incorporation, and its enactment must not be otherwise prohibited.¹⁴ That, under some circumstances, a bylaw might conflict with a statute, or operate unlawfully, is not a ground for finding it facially invalid.

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¹⁴.8 Del. C. § 109(b) (“The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation ....”); see also Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377, 398 (Del.2010) ( “[A] bylaw provision that conflicts with the DGCL is void.”).

Allegro's Bylaws attempt to authorize removal only for cause and to limit removal without cause to action taken in compliance with the Stockholders' Agreement. Article II, Section 10 states: "Any or all of the directors may be removed, with cause, by the holders of a majority of the shares of stock outstanding and entitled to vote for the election of directors. Directors may only be removed without cause as provided for in Section 9.4 of the Stockholders Agreement." JX 12 Art. II § 10. To the extent a bylaw

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conflicts with the DGCL or the certificate of incorporation, it is invalid. See 8 Del. C. § 109(b) (providing that the "bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees"); Crown EMAK, 992 A.2d at 398 ("[A] bylaw provision that conflicts with the DGCL is void."). Nevertheless, "[t]he bylaws of a corporation are presumed to be valid, and the courts will construe the bylaws in a manner consistent with the law rather than strike down the bylaws." Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985).

By purporting to provide that removal without cause can occur only "as provided for in Section 9.4 of the Stockholders Agreement," Article II, Section 10 potentially conflicts with Section 141(k) and the Charter. If Allegro stockholders who were not parties to the Stockholders' Agreement sought to remove one or more Remaining Directors without cause, the bylaw purportedly would restrict their statutory and Charter-based rights. To avoid the conflict, I read the bylaw as stating that to the extent stockholders who are parties to the Stockholders' Agreement seek to remove directors, they must comply with the Stockholders' Agreement's terms.