Opinion ID: 53575
Heading Depth: 3
Heading Rank: 2

Heading: Repeal of Bylaw Amendments

Text: The Board did not breach a duty to the REIT’s shareholders when it repealed Article II, Section 13 of the REIT’s bylaws, a provision that permitted shareholders to remove trustees by majority written consent. Even though the REIT’s bylaw that gave the Board exclusive dominion over any and all alterations or amendments to the bylaws is not conclusive per se, the fact that the REIT was attempting to shield the shareholders from further harm at the hands of an allegedly miscreant CEO does lead us to conclude that the Board acted properly when it revised the REIT’s bylaws to eliminate the majority written consent provision. Irrespective of whether Hartman or the REIT is correct about the Board’s real motives for repealing the majority written consent provision in the bylaws or about the standard the court should apply when evaluating the propriety of the Board’s act, the Board did not breach any 2 United States v. Lynch, 114 F.3d 61, 63 (5th Cir. 1997). 3 Women's Medical Center of Northwest Houston v. Bell, 248 F.3d 411, 418-19 (5th Cir. 2001). 4 See, e.g., Lake Charles Diesel, Inc. v. General Motors Corp, 328 F.3d 192, 195-96 (5th Cir. 2003). 4 No. 07-20315 fundamental duty to the shareholders when, as a means of protecting the shareholders from Hartman, it eliminated the bylaw that permitted shareholder action by majority written consent. The exclusive power to amend the REIT’s bylaws is expressly delegated to the Board. Article XIII of the REIT’s bylaws specifies that “[t]he Board of Trustees shall have exclusive power to adopt, alter, or repeal any provision of these Bylaws and to make new Bylaws.” As the REIT contends, in following this express authorization, the Board was exercising its lawful power to amend the bylaws. And, under the REIT’s properly amended bylaws, Hartman’s amended consent solicitation to remove the directors was a nullity. Our analysis cannot end here, however. Our review would be incomplete if we were to approve plenary power for a board to amend a REIT’s bylaws without any oversight based solely on the fact that these very bylaws contain a catch-all clause like this REIT’s Article XIII. No bylaw may excuse a board’s breach of a fundamental shareholder right or totally obviate a board’s duties to its shareholders. Indeed, because most boards of directors or trustees have at least some power to create or amend their own bylaws, including provisions like Article XIII that give boards exclusive power over bylaws, no bylaw is entirely sacrosanct. Article XIII cannot be interpreted to give the Board unlimited power over all bylaws under all circumstances, as the REIT would have it. Even a charter provision or bylaw that purports to vest a board with exclusive and unrestricted power to amend and alter the bylaws cannot create an unconditional, impenetrable shield for the directors or trustees. Although we disagree with the REIT’s contention that Article XIII alone immunizes the Board’s decision to repeal the majority written consent provision of Article II, Section 13, we are satisfied that the Board’s repeal of this bylaw was proper. The REIT explains that it repealed Article II, Section 13 solely to eliminate an inconsistency between the bylaws and the REIT’s Declaration of 5 No. 07-20315 Trust in the wake of a tender offer for the REIT from a competitor, and that its decision to do so is protected by the lenient business judgment rule. Hartman counters that the REIT’s explanation is a pretextual disguise of the truth that the Trustees repealed the majority written consent provision to defend themselves from his efforts to replace them. Hartman asserts that the Board’s actions should be judged not by the business judgment rule but a higher fiduciary standard, and that the Board breached a fiduciary duty to the shareholders when it amended the REIT’s bylaws to prevent the shareholders from acting by majority written consent as an alternative to voting at a duly called meeting. Regardless of the Board’s motive for eliminating the REIT’s majority written consent provision, and regardless of whether that act is tested under the business judgment rule or a stricter fiduciary duty standard, the Board clearly acted in the best interest of the shareholders when it erected defensive barriers to protect the REIT from Hartman. Thus, the Board could not have breached any duty to the shareholders, no matter how reviewed. The Board’s defensive actions under these circumstances would satisfy any standard by which boards are judged. Hartman had allegedly done harm to the REIT during his tenure at its helm. The Board did not disenfranchise the shareholders; rather, in a legitimate effort to save the REIT from a ruinous sequel, the Board simply eliminated one alternative method for shareholders to exercise their voting rights. As repeal of the majority written consent provision was so obviously a good faith attempt to protect the interests of the REIT and its shareholders, the Board could not have violated any duty owed to the shareholders, regardless of whether the Board’s act is tested under the business judgment rule or a stricter fiduciary standard. Hartman’s self-serving attempt to don a pro-shareholder white hat is unconvincing. The Board’s repeal of the bylaws’ majority written consent 6 No. 07-20315 provision was a legitimate exercise of the Board’s duty to protect the REIT and its shareholders. Regardless of how the exact duty owed by the Board to the REIT’s shareholders is defined, or what the actual motive for the Board’s repeal of the majority written consent provision was, the Board breached no duty when it amended the bylaws to protect the REIT from Hartman, with the obvious purpose of advancing, not harming, the shareholders’ interests.