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Klaassen v. Allegro Development Corp. | 106 A.3d 1035 (2014)
Picture this: a thriving company on the rise, venture capital flowing in, and a C E O at the helm. But what happens when the tides turn and the board of directors loses faith in its leader? Can the board remove him without notice? Klaassen versus Allegro Development Corporation explores these questions.
In nineteen eighty four, Eldon Klaassen founded Allegro Development Corporation. Klaassen served as Allegro’s C E O and, up until two thousand seven, was Allegro’s sole shareholder.
In two thousand seven, Allegro solicited capital infusions. Two venture capital firms invested forty million dollars in exchange for preferred stock.
Allegro, Klaassen, and the investors entered a stockholders’ agreement and amended the corporate charter and bylaws to reorganize Allegro’s board of directors. Under those documents, the investors became entitled to elect three directors, the common stockholders were entitled to elect one, and the remaining three directors were designated by the C E O and approved by a stockholder vote. In practice, Allegro operated with a five member board with two directors elected by the investors, two outside directors, and Klaassen as C E O.
Unfortunately, soon after the investment, Allegro’s revenues started to drastically decline. The board became frustrated with Klaassen’s performance and management. By the fall of twenty twelve, the board sought to remove Klaassen as C E O. On November first, at a regularly scheduled board meeting, four directors voted to remove Klaassen as C E O and appointed an interim C E O.
Initially, Klaassen offered to help with the interim C E O’s transition and negotiated with Allegro regarding a consulting agreement. However, at some point, Klaassen began expressing displeasure with his removal.
In June twenty thirteen, Klaassen sent a letter to the board claiming his removal was invalid and purporting to remove the outside directors and elect new directors.
Klaassen also filed an action for declaratory relief, arguing his removal was invalid because the board didn’t give him advance notice of his termination and employed deception in its decision to terminate. The directors countered that Klaassen’s claims were equitable and barred by the equitable defense of acquiescence.
The chancery court agreed with the directors. Klaassen appealed to the Delaware Supreme Court.
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