October, 1997

Electing Directors of Delaware Corporations by Written Consent

Delaware has recently amended its corporate statute specifically to permit the shareholders of Delaware corporations to elect directors by written consent in certain instances rather than by holding a shareholders' meeting, even if the written consent is not unanimous. The Delaware legislature thus overturns a 1996 Delaware Chancery Court decision, Hoschett v. TSI International Software, Ltd., 683 A.2d 43 (1996), holding that a Delaware corporation cannot satisfy its statutory obligation to hold an annual meeting of the shareholders by having the holders of a majority of the shares entitled to vote execute a written consent in lieu of the annual meeting.

In Hoschett, the holders of a majority of the corporation's voting power executed a written consent to elect five individuals as directors. The written consent had been executed in compliance with the provisions of Section 228 of the Delaware General Corporation Law ("DGCL"). The plaintiff shareholder contended that this consent was insufficient, as the corporation had a statutory obligation under Section 211(b) of the DGCL to hold an annual meeting of the shareholders. The court agreed, reasoning that the annual meeting serves purposes other than the election of directors, including opportunities to bring matters before the shareholder body, such as oral reports, questions and answers, and in rare instances, proxy contests, and between shareholders and managers. The court concluded that "absent unanimous written consent," the corporation was obligated to convene an annual meeting of its shareholders to elect directors.

Section 211 of the DGCL, as amended, now specifically permits directors of a Delaware corporation to be elected by a written consent in lieu of an annual meeting, unless the corporation's certificate of incorporation prohibits this action. However, if a corporation cannot get unanimous consent, the shareholders may elect directors by written consent of the majority of the shareholders entitled to vote for election of directors only if all of the positions to which directors could be elected at an annual meeting held at the effective time of the consent are vacant, and if the consent fills those positions. The official comment to the amendment notes that, if a corporation cannot obtain unanimous consent, then, in order to use a written consent instead of holding a shareholders' meeting, it will be required to remove all directors or have all directors resign before the effective time of the consent. The corporation does not need this resignation or removal of directors if it obtains unanimous consent.