In the recent West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., the Delaware Chancery Court delivered an unexpected bench slap to the corporate bar regarding the scope of permissible stockholder agreement provisions that implicate corporate governance matters typically under the purview of directors under the Delaware General Corporation Law (DGCL).

In Moelis, the company executed a stockholder agreement with its founder, chief executive and controlling stockholder the day before the company’s initial public offering. The agreement gave the stockholder three classes of rights: (i) pre-approval rights regarding certain corporate action, including incurrence of certain debt, issuance of equity securities, certain officer appointment and removal, dividend declarations and entering certain material contracts (Veto Rights); (ii) board composition rights, including board size and founder designation, nomination and appointment rights (Board Rights) and (iii) committee composition rights, including appointment of proportional number of the founder’s designees (Committee Rights).

DGCL Section 141(a) provides, in pertinent part: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of the board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.”

Since none of these stockholder agreement provisions appeared in the company’s certificate of incorporation, company stockholders sued to have these provisions invalidated under DGCL Section 141(a).

The Moelis court determined that the Veto Rights, certain of the Board Rights, and the Committee Rights were facially invalid under its analysis of Section 141(a) case law by effectively removing from directors their ability to freely exercise their judgment on management matters in the best interests of stockholders. The court also determined that certain of Board Rights were not found to be facially invalidated for not technically violating this standard.

The Moelis decision is the Delaware Chancery Court’s most recent reminder of director primacy regarding Delaware corporate governance matters. However, certain of the stockholder agreement provisions it invalidated — or ones similar to them  are considered fairly standard for stockholder agreements applicable to public and private corporations.

Delaware corporate practitioners were surprised. Trade groups quickly took action[1], and the Delaware State Bar Association’s Council of Corporate Law Section drafted a proposed DGCL amendment intended to realign the statute with prevailing practice.[2]

Section 122 of the DGCL would be amended to include a new subsection (18) to expressly provide that a corporation is permitted to enter contracts with stockholders containing consent rights and provisions invalidated by the Moelis decision.

In summary, the draft subsection (18) sets forth the types of provisions that can be included in contracts with current or prospective stockholders, even if those provisions are not contained or ascertainable under the company’s certificate of incorporation. Generally speaking, these provisions may (i) restrict or prohibit corporate actions or require the approval or consent of a person or body prior to taking corporate actions identified in the contract, and (ii) require the corporation or other person or body to covenant to take or refrain from taking corporate actions specified in the contract. For the contract to be valid, the corporation must receive contract consideration in a form approved by the board. Upon execution of the contract, the corporation would then be subject to contractual remedies available under law.[3]

Assuming the Delaware legislature passes the amendment substantially in the form as drafted, stockholder agreements compliant with it should not run afoul of DGCL Section 141(a) and the Moelis mess should be cleaned up.

[1] See, e.g., National Venture Capital Association’s April 2024 annotations to its model documents addressing the Moelis decision.

[2] HB proposed 8 Del. C. § 122(18).

[3] See DGCL Amendments Bill Form Synopsis at pp. 9-10.