In West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.,[1] Vice Chancellor Travis Laster invalidated provisions of a stockholder agreement between Moelis & Company and Ken Moelis. Moelis & Co. is a publicly traded investment bank.[2] Ken Moelis is the firm’s founder, CEO, and Chairman of the Board.[3] Prior to Moelis & Co.;s IPO, Moelis and three affiliates entered into a stockholder agreement with the company, pursuant to which Moelis and his affiliates were granted extensive governance rights, which allegedly divested control from the Company’s board.[4] The agreement was fully disclosed before the Company’s 2014 IPO.[5]
In the opinion, the Vice Chancellor strongly reaffirmed the board centric nature of Delaware corporate law, which remains the rule even when the company has a controlling a shareholder.[6] After a lengthy review of Delaware case law on the distinction between invalid restrictions on board authority from valid contractual provisions impacting the board’s authority,[7] the Vice Chancellor concluded that the pre-approval rights, certain board composition provisions, and committee composition provisions fell on the invalid side of the line.[8] Although the Vice Chancellor acknowledged that agreements of the sort at issue in the case at bar had become common market practice, he emphasized that the statute controls when the two conflict.[9] Despite that seemingly self-evident truism, the decision generated substantial blowback from the practicing bar.[10] In particular, despite the opinion’s considerable length, it left practitioners frustrated by what they saw as considerable uncertainty as to how to apply the decision in the future.[11] This uncertainty had real world consequences, because it cast into doubt the validity of thousands of existing contracts[12] and “caused confusion about how such agreements should be prepared moving forward.”[13]
Three months later Vice Chancellor Laster returned to the fray in Wagner v BRP Group, Inc.,[14] in which a similar contract was at issue.[15] In Wagner, the Vice Chancellor described Moelis as having adopted a two pronged test. First, to determine whether the agreement implicates the boards authority under DGCL § 141(a), the court must evaluate “whether the challenged provision constitutes part of the corporation’s internal governance arrangement. If not, then the inquiry ends.”[16] Second, the court must determine whether the arrangements “have the effect of removing from directors in a very substantial way their duty to use their own best judgment on management matters” or “tend[ ] to limit in a substantial way the freedom of director decisions on matters of management policy ….”[17]
As for the initial inquiry, the Vice Chancellor identified seven considerations to be weighed.[18] He concluded that the agreement at issue “closely resembles the stockholder agreement at issue in the Moelis Merits decision, and it provides another prototype of an agreement that falls into that category.”[19] Although practitioners may take some solace in having a second example of an invalid contract, it may be doubted whether a seven factor, highly fact specific test will provide much in the way of new certainty.[20]
As for the second factor, the Vice Chancellor concluded that the agreements substantially limited the board’s authority and were thus invalid.[21] Among other problems, the agreement required the CEO’s prior written approval of a proposal before the board could act on it. Explaining that such a provision put the cart before the horse, the Vice Chancellor observed that the agreement put “the Board in the same position as a management team that proposes options for a board to review and approve.”[22] Quoting your truly, the Vice Chancellor observed that the “power to review is the power to decide.”[23] By giving the CEO the power to review, the agreement gave him the power to decide, which is a power the statute reserved to the board.[24]
The decision strikes me as sound on the merits. Speaking as an ex-transactional lawyer, however, I would like to have seen brighter lines than the opinion offers. Speaking as a case book author, I’d like to see a much shorter opinion. It’s very very hard to whittle modern Chancery decisions down into a manageable length.
In Moelis, the Vice Chancellor practically invited the Delaware legislature to decide whether the statute should be amended so as to allow the pre-Moelis market practice to continue.[25] In fact, the Delaware bar has proposed legislation that, among other things, would reverse Moelis. Tulane law professor Ann Lipton has been commenting frequently on that legislation:
What is the value of the corporate charter, a reprise
What is the value of the corporate form?
In the most recent post (the first listed above), Lipton (correctly IMHO) observes that:
… these proposed DGCL changes have very far reaching social consequences that simply have not been explored by Delaware lawmakers, let alone The Rest of Society.
I should also note that our friend who runs the invaluable The Chancery Daily has also been covering the legislative maneuvers with great insight. Here’s a collection of Chancery Daily links.
Somewhat more controversially, VC Laster has been blogging about them on LinkedIn:
Although I’ve heard grumblings from various sources that the Vice Chancellor should not be essentially blogging on legal issues, I don’t have a problem with it as a general matter. In a disclaimer to the first posted listed above, VC Laster states:
I offer the comments in this post in my personal capacity. Canon 4 of the Delaware Judges’ Code of Judicial Conduct permits a judge to engage in “activities to improve the law, the legal system, and the administration of justice.” That canon says that “[a] judge may speak, write, lecture, teach, and participate in other activities concerning the law, the legal system, and the administration of justice (including projects directed to the drafting of legislation).” By writing this post, I am attempting to “write” on an issue concerning “the law, the legal system, and the administration of justice.” If someone had scheduled a CLE about the market practice amendments, I would have said the same things there.
That strikes me as correct. There is a long tradition of Delaware jurists engaging with the bar by writing law review articles, speaking at conferences, and so on. (After all, what else is there to do in Wilmington? I ask with love, of course.) Blogging on LinkedIn doesn’t strike me as differing in kind from those more traditional venues.
[1] 311 A.3d 809 (Del. Ch. 2024).
[2] Id. at 817.
[3] Id.
[4] Id. at 818. The agreement provided that:
Under its terms, the Company’s board of directors (the “Board”) must obtain Moelis’ prior written consent before taking eighteen different categories of action (the “Pre-Approval Requirements”). The Pre-Approval Requirements encompass virtually everything the Board can do. . . .
Another set of provisions compels the Board to ensure that Moelis can select a majority of its members . . ..
A final provision in the Stockholder Agreement forces the Board to populate any committee with a number of Moelis’ designees proportionate to the number of designees on the full Board . . ..
Id.
[5] Important Chancery Decision Upends Practice of Providing Certain Governance Rights in Stockholder Agreements—Moelis, FriedFrank.com (Mar. 4, 2024), https://www.friedfrank.com/news-and-insights/important-chancery-decision-upends-practice-of-providing-certain-governance-rights-in-stockholder-agreements-moelis-11629.
[6] See Moelis, 311 A.3d at 817 (“[D]irector primacy remains the centerpiece of Delaware law, even when a controlling stockholder is present.”; quoting In re CNX Gas Corp. S’holders Litig., 2010 WL 2291842, at *15 (Del. Ch. May 25, 2010).). See generally Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547 (2003) (setting out the corporate governance theory known as director primacy and using it to explain Delaware corporate law’s board centric nature).
[7] Although I agree with the Vice Chancellor’s reading of the case law, my own view is that Delaware law—as a matter of policy—is overly restrictive with respect to arrangements by which a board precommits to limits on its authority. See generally Stephen M. Bainbridge, Precommitment Strategies in Corporate Law: The Case of Dead Hand and No Hand Pills. J. Corp. L. 1 (2003).
[8] See Moelis, 311 A.3d at 881 (“The plaintiff’s motion for summary judgment is granted as to the facial invalidity of the Pre-Approval Requirements, the Recommendation Requirement, the Vacancy Requirement, and the Size Requirement.”).
[9] See id. (“When market practice meets a statute, the statute prevails.). The Vice Chancellor’s decision calls to mind Judge Learned Hand’s famous decision in The T.J. Hooper, 60 F.2d 737 (2d Cir. 1932), which held that market practice could not insulate a defendant from tort liability. See id. at 740 (holding that “there are precautions so imperative that even their universal disregard will not excuse their omission”).
[10] See, e.g., Mike Leonard, Novel Corporate Rulings Fuel Charged Debate on Delaware’s Role, BloombergLaw.com (Mar, 28, 2024) (noting the “doomsaying” that followed Moelis), https://news.bloomberglaw.com/esg/novel-corporate-rulings-fuel-charged-debate-on-delawares-role.
[11] See, e.g., Krebs, supra note 13 (noting that Moelis was “highlighted as having caused confusion over settled practice”); Leonard, supra note 37 (“Laster . . . stopped short of drawing the types of bright lines the state’s corporations have come to expect.”); Mike Leonard, Moelis Ruling Sharpens Focus on Private Equity Veto Agreements, BloombergLaw.com (Mar. 6, 2024) (noting that the decision “raised significant questions about how a more modest collection of veto provisions might fare”), https://www.bloomberglaw.com/product/blaw/bloombergtaxnews/esg/BNA%200000018deb14dc3fabedff7e70ca0000.
[12] See Benjamin Hron, Linkedin.com (asserting that “there are thousands of deals every year that include agreements with provisions that have just been declared unenforceable”), https://www.linkedin.com/posts/bmhron_a-little-over-a-month-ago-a-judge-in-delaware-activity-7182464067519836162-HqQb.
[13] Krebs, supra note 13.
[14] No. 2023-0150-JTL, 2024 WL 2741191 (Del. Ch. May 28, 2024).
[15] See id. at *1 (describing the agreement at bar as providing that, “as long as the founder and his affiliates beneficially own at least 10% of the outstanding shares, then the corporation must obtain the founder’s prior written approval before it can engage in a lengthy list of actions”).
[16] Wagner, 2024 WL 2741191 at *13 (quoting Moelis, 311 A.3d at 828).
[17] Id. (quoting Abercrombie v. Davies, 123 A.2d 893, 899 (Del. Ch. 1956), rev’d on other grounds, 130 A.2d 338 (Del. 1957)).
[18] See id. at *14-15; see also Mike Leonard, Stockholder Pacts Get New Guidance 3 Months After Moelis Ruling, BloombergLaw.com (May 28, 2024) (“Those considerations include whether the parties to the pact hold management roles at the company; whether the accord addresses matters covered by Delaware’s corporate statutes; whether its provisions regulate the exercise of corporate power; whether the company can terminate the contract; and whether it reflects a bona fide commercial exchange.”), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/securities-law/BNA%200000018f-c02d-d278-a19f-d03f9e000001.
[19] Wagner, 2024 WL 2741191 at *15.
[20] As U.S. Supreme Court Justice Gorsuch observed, albeit in a very different legal setting, “a multi-step, multi-factor inquiry guarantees more uncertainty and much litigation.” Kisor v. Wilkie, 588 U.S. 558, 630 (2019) (Gorsuch, J., concurring). See generally Eli J. Richardson, Taking Issue with Issue Preclusion: Reinventing Collateral Estoppel, 65 Miss. L.J. 41, 73 (1995) (observing that “multi-factor element tests inherently are insusceptible to predictable results”).
[21] Wagner, 2024 WL 2741191 at *16-17.
[22] Id. at *17.
[23] Id. (quoting Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 Stan. L. Rev. 791, 815 (2002)).
[24] Id.
[25] See W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809, 881 (Del. Ch. 2024) (“Of course, the General Assembly could enact a provision stating what stockholder agreements can do.”).