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Klaassen v. Allegro Development Corp.

Delaware Supreme Court
106 A.3d 1035 (2014)


Facts

In 1984, Eldon Klaassen (plaintiff) founded Allegro Development Corporation (defendant), a software company. In 2007, Klaassen solicited investments from venture capital firms. North Bridge Growth Equity 1, LP and Tudor Ventures III, LP (the Series A investors) invested a total of $40 million in exchange for all of Allegro’s Series A preferred stock. Allegro, Klaassen, and the Series A investors entered into a stockholders’ agreement and amended the corporate charter and bylaws to organize Allegro’s board of directors as a seven-member board. The board would include three directors elected by the holders of Series A preferred stock, one director elected by holders of common stock, the CEO, and two directors designated by the CEO and approved by a vote of stockholders. In practice, Allegro operated with a five-member board (two directors elected by holders of Series A preferred stock, two outside directors, and Klaassen as CEO). Soon after the infusion of capital from Series A investors, Allegro’s revenues started to decline drastically. The board and Allegro’s shareholders grew frustrated with Klaassen’s performance and conduct. By fall of 2012, the board had turned against Klaassen and sought his removal. On November 1, 2012, at a regularly scheduled board meeting, the four directors of Allegro voted to remove Klaassen as CEO (with Klaassen abstaining) and appoint Raymond Hood as interim CEO. Initially, Klaassen offered to help Hood transition into his role as CEO. Klaassen also entered into negotiations with Allegro regarding a consulting agreement. The board appointed Klaassen to two committees. On one committee, Klaassen reviewed and provided feedback on Hood’s employment agreement. At some point, Klaassen started indicating he was unhappy with his removal. In June 2013, Klaassen attempted to retake his position as CEO, arguing his removal was invalid and voidable. Klaassen claimed the power to remove two directors and elect three new directors. At the same time, Klaassen filed an action for declaratory relief in the Delaware Court of Chancery, claiming that the directors had breached their fiduciary duty and did not give him notice of their plan to remove him.

Rule of Law

Issue

Holding and Reasoning (Jacobs, J.)

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