Delaware law entrusts the management of a corporation to its board of directors. Not surprisingly, circumstances arise where a consensus among directors cannot be reached on major decisions impacting a company. In many cases, a board is composed of an odd number of directors, typically eliminating the potential for deadlock. However, where an even number of directors sit on a board, deadlocks can arise. In those situations, assuming certain statutory criteria is met, the Delaware Court of Chancery may appoint a custodian to act as a director and resolve the deadlock.
In Kleinberg v. Aharon, Delaware’s Court of Chancery was confronted with a deadlocked board of six directors, a company teetering on the brink of collapse and a request for the court to appoint a custodian. After being satisfied that the conditions set forth in Section 226 of Delaware’s General Corporation Law were met, the court rendered an opinion granting the request for a custodian to be appointed with limited powers to act as a director. This decision provides practitioners with a useful road map in considering claims under Section 226 while providing a cautionary tale for those drafting voting agreements or other corporate agreements with ineffective dispute resolution mechanisms. It’s outcome also provides contrast to the highly publicized Delaware Supreme Court ruling in Shawe v. Elting.
