New guidance on handling disruptive directors: following a Delaware Supreme Court ruling, directors who seek to exclude their colleagues from boardroom deliberation may be risking personal liability for taking such actions.

Author:Raymond, Doug
Position:LEGAL BRIEF

An effective board, the commentators say, is collaborative and diverse, in which different perspectives are given thoughtful consideration in a respectful and high-functioning environment focused on creating shareholder value.

The reality is often different.

Boards, like any other social organization, can be dysfunctional, and some directors can be particularly challenging to get along with. A director may pursue a specific agenda to the exclusion of other business, such as putting the company up for sale when the other directors are not in favor of that step; but a director's personality quirks or even personal vendettas may also disrupt board deliberations. In these circumstances, the other directors may be tempted to exclude the directors they see as disruptive, so they can get on with the rest of their business without distraction. A recent case highlights that doing so prevents the excluded director from exercising his fiduciary responsibilities, and calls into question whether the other directors have violated theirs.

Under the Delaware Corporation law, a board of directors, with limited exceptions, may delegate authority to a committee of the board, including a committee comprised of all but one director. Particularly in public corporations, the demands of the board's oversight function, and the need to comply with Sarbanes-Oxley, Dodd-Frank, and the extensive array of other complex securities laws, generally necessitate extensive reliance on board committees, including the audit committee, the compensation committee, and the governance committee. Many boards have also delegated authority to an executive committee, granting it the authority to "exercise the full authority of the full board, between meetings of the board."

At first glance, relying upon an executive committee, comprised of all of the directors other than the unruly ones, may appear to present an elegant way to neutralize a disruptive or contentious board member. By confining most of the board's business to the executive committee, the regular board meetings become inconsequential, and the unruly director is effectively isolated from the important business of the boardroom. However, this approach recently encountered sharp criticism from the Delaware Supreme Court in OptimisCorp v. Waite, Del. Supr., No. 523, 2015 (2016).

A CEO taken unaware

In OptimisCorp, the board of OptimisCorp had called a special meeting to remove the company's CEO and a fellow director (because...

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