In this post-trial decision in a proceeding pursuant to 8 Del. C. § 225, the Court of Chancery held that the board of the Sudan Relief Fund, Inc. (the “Fund”), a charitable corporation, validly removed the plaintiff as a director, rejecting the plaintiff’s argument that the defendant directors violated their fiduciary duties and the corporation’s bylaws by removing him. Notably, the Court held that even if three of the eight directors at the time of the plaintiff’s removal had no valid claim to their director seats, they were nevertheless “de facto” directors, and board action taken during their tenure could not be invalidated for that reason alone.
The Fund is a Delaware non-profit, nonstock corporation focused on providing relief to the people of southern Sudan. The plaintiff, Bishop Macram Max Gassis, is a former Catholic Bishop of the El Obeid Diocese in Sudan and was the public face of the Fund’s charitable efforts. Until his removal in August 2013, Bishop Gassis served as Chairman of the Fund’s board.
In 2010, a rift developed in the Fund’s board. Bishop Gassis and his two supporters on the Board asserted that the rift was attributable to disagreements regarding allocation of the Fund’s donations. The remaining directors asserted that they wanted to remove Bishop Gassis from the board because of, among other things, “personality conflicts,” questions about accounting for certain funds spent, and the Bishop’s perceived view that the Fund was his personal property that would inure to his benefit upon his retirement.
The Fund’s bylaws provided for a “self-perpetuating” board with director elections to be held at the Fund’s annual meeting. Following several years of not holding annual meetings, in 2011 the Fund held an annual meeting at which the board voted to re-elect all the directors except Nina Shea, one of Bishop Gassis’s supporters. The board voted by email in the following weeks to add two new directors to the board, Kathleen Hunt and Rodger Hunter-Hall. At the 2012 annual meeting, all the directors were re-elected except David Forte, another of the Bishop’s supporters. Bishop Gassis made procedural objections to each of these actions.
In a special meeting held in August 2013, the board voted to add Neil Corkery to the board and to adopt resolutions that, among other things, (i) provided that the Bishop’s term as Chairman would expire on September 20, 2013, the date he was required by canon law to resign as Bishop, and (ii) removed a provision of the Fund’s bylaws providing that Bishop Gassis would hold the position of Chairman “until his retirement or resignation.”
In September 2013, Bishop Gassis filed a complaint seeking, among other things, relief under Section 225 in the form of an order reinstating Bishop Gassis, Nina Shea, and David Forte to the board, and removing Kathleen Hunt, Rodger Hunter-Hall, and Neil Corkery from the board. On May 7, 2014, the Court held a one-day trial on the Section 225 claim.
As a preliminary matter, the Court noted that the plaintiff did not challenge the provision in the Fund’s bylaws permitting directors to remove other directors. The Court noted that, although only the members of a nonstock corporation are vested with the right to remove directors pursuant to 8 Del. C. § 141(k), the Fund specifically opted out of 8 Del. C. § 141(k) in its certificate of incorporation, as is permitted for nonstock corporations by 8 Del. C. § 141(j).
The Court then proceeded to address Bishop Gassis’s claim that his removal violated Sections 3.06 and 3.04 of the Fund’s bylaws. Section 3.06 permits removal of any “elected” director by a two-thirds vote of the board, with or without cause. Section 3.04, before it was removed by the August 2013 resolutions, stated that the Chairman of the Fund’s board “shall be” Bishop Gassis “until his retirement or resignation.” As to Section 3.06, the Court found that Bishop Gassis was “elected” to the board before the adoption of Section 3.04 and was therefore subject to removal pursuant to Section 3.06, rejecting the Bishop’s argument that he was an “appointed” director not subject to removal.
The Court further held that Section 3.04 does not constrain the Bishop’s removal as a director and instead refers only to his status as “Chairman,” a position the Court described as “an officer, not a director.” In any event, the Court held that a majority of the board approved resolutions removing Section 3.04, as expressly permitted by Section 7.08 of the Fund’s bylaws. The Court next rejected Bishop Gassis’s assertion that the repeal of Section 3.04 was invalid because three board members at the time of the vote to remove Section 3.04 had not been validly elected to the board. Citing Hockessin Community Center, Inc. v. Swift, the Court held that procedural deficiencies in a director’s election confer “de facto” director status, and board action taken before such a director is removed cannot be invalidated on that basis alone. Thus, the removal of Bishop Gassis could not be challenged on the basis that directors that voted to remove him were not validly elected to the board. Alternatively, the Court concluded that even if the Court set aside the votes of those three directors, the Bishop would still have been validly removed by a super-majority vote of the remaining directors.
The Court next addressed Bishop Gassis’s claim that his removal should be invalidated because the defendants acted out of retaliation and in violation of their fiduciary duties. The Court rejected the Bishop’s argument that he was removed in retaliation for exercising his right to inspect the Fund’s books and records under 8 Del. C. § 220, finding that the board was motivated to remove Bishop Gassis by policy and personality conflicts, not retaliation, and that, in any event, Section 3.06 allows removal of directors without cause. The Court also concluded that the Bishop’s removal did not constitute a breach of the board’s fiduciary duties. The Court explained that the board of a non-profit, nonstock corporation owes fiduciary duties to its beneficiaries, not its members or directors. The Court also held that Bishop Gassis had not put forth evidence sufficient to rebut the presumption that his removal was the product of the board’s valid business judgment, finding instead that the record supported a conclusion that the director defendants acted because they believed it was in the Fund’s best interest, and not out of self-interest or a desire to maintain or enhance their control of the Fund.
Finally, the Court held that because Bishop Gassis had been validly removed as a director, and was therefore no longer a member of the Fund, he lacked standing under 8 Del. C. § 225 to challenge the removal of Nina Shea and David Forte or the election of Kathleen Hunt, Rodger Hunter-Hall, and Neil Corkery.
The full opinion is available here